If the Debt Limit is Reached, Should the Treasury Keep Borrowing to Meet Certain Obligations? (S. 1740)

What is S. 1740?

(Updated February 8, 2019)

This bill — known as the Default Prevention Act — would prioritize the federal government’s spending obligations in the event that the debt limit is reached as tax revenue comes in. Priorities would be as follows: 1) paying the interest and principal on the national debt to avoid default; 2) pay and benefits for active duty military personnel; 3) Social Security benefits, including survivors and disability insurance benefits; 4) Medicare benefits; 5) obligations from programs administered by the Dept. of Veterans Affairs (VA).

The Treasury Dept. would be authorized to use its extraordinary measures and to continue issuing debt to meet the above obligations.

Argument in favor

Failing to service the national debt and defaulting could trigger a debt spiral that damages the entire U.S. economy. Reneging on Social Security & Medicare would harm vulnerable populations. This bill will prevent that kind of disaster.

Argument opposed

This bill lowers expectations by planning for Congress to fail to raise the debt limit. Lawmakers should focus on a solution rather than preparing a backup plan in case they fail to do what they need to.

Impact

Taxpayers; members of the military; beneficiaries of Social Security, Medicare, and VA programs; and the Treasury Dept.

Cost of S. 1740

A CBO cost estimate is unavailable.

Additional Info

In-Depth: Sponsoring Sen. Rand Paul (R-KY) introduced this bill to prevent the U.S. from defaulting on its debt if Congress fails to raise the debt ceiling, and offered the following statement when he authored this legislation’s predecessor:

“My legislation takes the possibility of default off the table so we can continue to push for fiscal restraint. There is no reason the government would — or should — responsibly consider the idea of default.”

Of Note: The term ‘debt held by the public’ refers to individuals, companies, state or local governments, Federal Reserve Banks, and foreign governments that own federal debt securities like bonds, T-bills, TIPS, savings bonds. Currently, debt held by the public accounts for about $13 trillion of the total national debt, which exceeds $18 trillion.

Once a country defaults on its sovereign debt, there is a risk of a debt spiral beginning. A debt spiral happens when interest rates on the country’s debt securities rise because of a default, which means that the government has to spend more money servicing its debt. In the absence of economic growth and increased tax revenue, this requires the government to issue more debt simply to service existing debt.

The debt limit was most recently through March 1, 2019 by the passage of the Bipartisan Budget Act on February 9, 2018.

Media:

• Sponsoring Sen. Rand Paul (R-KY) Press Release (Previous Version)
  
• Breitbart (Previous Version)
  
• Americans for Tax Reform (In Favor - Previous Version)