The debt ceiling: Here we go again

The fight is over federal spending. But state and local budgets suffer anyway.

Photo by Harold Mendoza on Unsplash

It’s hard to get away from the debt ceiling standoff headlines these days as the deadline looms nearer. I haven’t written about it until now because I thought for sure we’d all learned our lesson from 2011. That was bad, right? And even worse for state and local governments.

Apparently history is easily forgotten. So this week’s LSS is a brush-up on how state and local governments got burned the last time Congress used Uncle Sam’s credit as a bargaining chip. And why it might be so much worse this time if the same concessions are made. 

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What are Republicans and Democrats arguing about?

It’s up to Congress to raise the U.S. government’s debt limit, or ceiling, every so often and usually it’s done as a matter-of-course. In fact, Congress has either raised or suspended the debt ceiling 78 times since 1962, including three times under President Trump.

In January, the federal government hit its borrowing limit of $31.4 trillion and cash flow has been managed through budgetary maneuvers. But this week, the Treasury Department warned that the government could run out of cash to pay its bills by June 1 unless it’s given additional borrowing authority.

In other words, the U.S. would default on its debt—an unprecedented event that could rattle financial markets and tip our economy into another recession.

House Republicans say they’ll vote to raise the debt limit a teeny-tiny bit, but only if Congress cuts billions of dollars in federal spending and repeals some of President Biden’s recent legislative accomplishments. It’s straight out of their playbook from the 2011 standoff, which didn’t have great results for state and local governments.

Sequestration choked state and local budgets

The last major debt ceiling standoff resulted in an embarrassing downgrade of the U.S. government’s credit rating and the Budget Control Act (BCA) of 2011. The BCA raised the U.S.’s borrowing limit but also imposed harsh spending caps on discretionary programs. 

Doing so meant federal spending didn’t keep pace with inflation and essentially equated to cuts to federal funding of many programs that benefit states and localities. (Medicaid and the Children’s Health Insurance Program were exempted from the cuts.) 

This was referred to as sequestration, or the era of austerity. Problem is, when the feds cut spending on necessary things like education or infrastructure, it doesn’t eliminate the need to spend money on that stuff. So federal “austerity” really just meant passing the buck to state and local governments. 

And when state governments cut spending and programs—which they did—those costs get passed downhill to local governments. (The words “unfunded mandate” got thrown around a lot in the 2010s and with good reason.) But no matter how you slice it, taxpayers get hurt through tax hikes or reduced services. 

What’s more the federal spigot was turned off precisely when the revenue impact of the Great Recession started hitting state and local budgets. This one-two punch resulted in a massive slowdown in government spending which many say stalled economic growth and prolonged the recession recovery. 

This fact is also one of the reasons the American Rescue Plan Act gave states and localities a lot of relief funding to spend over a relatively longer period of time. Still, there are many who say that the government pumped too much money into the economy and jumpstarted inflation.

But here’s the kicker: Rising inflation today could make this standoff worse. State and local governments are already feeling the effects of inflation on their budgets and are planning for limited spending increases. If this standoff results in another era of federal spending caps and cuts, it could further constrain states and localities. 

Two more ways sequestration cost us