A debt ceiling fight and national security – no good choices

U.S. President Joe Biden and Speaker of the House Kevin McCarthy (R-CA) depart the U.S. Capitol following the Friends of Ireland Luncheon on Saint Patrick’s Day March 17, 2023 in Washington, DC. (Photo by Drew Angerer/Getty Images)

With the US government rapidly approaching the debt limit and an ensuing economic crisis, political leaders are trying to hammer out a last-minute deal. In this new op-ed, AEI’s John Ferrari and Charles Rahr lay out the national security implications from a debt default — as well as how even an imperfect deal could still damage America’s military.

President Joe Biden and House Speaker Kevin McCarthy spent Monday night huddled in discussions around avoiding a default on the debt ceiling. That’s good for the country – the issue must be addressed before the looming deadline. But in the rush to strike a deal, it’s becoming clear that few truly understand the Gordian Knot tying the debt ceiling and national security. This isn’t just an economic issue, but one that could send shockwaves throughout the ability of America’s military to execute its mission.

For those of us old enough to remember, the comedians Laurel and Hardy used to say “This is a fine mess you’ve gotten us into.” That certainly feels apt when it comes to the question of the debt limit.

Many have been wondering what would happen to defense if the federal government breaches the debt ceiling, with some suggesting our military could possibly not get paid. Breaching the debt ceiling is very different than a government shutdown in that the government stays open, but does not have enough cash to pay its bills. It is important to note that the government is not out of money; it just does not have enough to meet all of its bills.

If the government operated like a household, they would sift through the bills that had to be paid — interest, payroll, and more — while delaying payments to others. For defense, they could pay the troops while not paying the largest defense contractors. However, it has been implied that the Treasury cannot or will do that. Our government, with its annual spend of trillions of dollars, apparently operates with a chainsaw rather than a scalpel.

Given this, the three potential options that we’re now staring down in a debt ceiling deal are all bad for national security. We can only hope our elected leaders pick the “least-worse option.”

Default: If the government doesn’t reach a deal and cannot prioritize payments like California did in 2009, thus missing interest payments, it could potentially damage our national security for decades to come in two ways.

First, moving forward, the US could pay higher interest rates to continue to borrow money, thus siphoning more funds away from other budget priorities. Second, it gives competitors such as China and Russia a huge messaging win that the Western nations and their way of doing business is corrupt, almost literally bankrupt, and not to be trusted. It is a reason for nations which haven’t yet definitively sided with any major power to hedge their bets and to not fall in line with our priorities.

Clean Debt Increase, No Reforms: Some argue that this is the path that should be taken. However, without any reform there will be less and less space to pay our nation’s defense bill due to rising interest payments on our ballooning national debt, now over $31 trillion. According to projections from the Congressional Budget Office, net interest payments are expected to exceed defense spending by 2029 [PDF]. And, in just a decade from now, it’s anticipated that those interest payments will consume 3.6 percent of our gross domestic product compared to 2.8 percent for defense [PDF]. That should be a cause for concern for everyone as the increasing need to pay off interest means that there will be less money available for other priorities, including defense.

Sequestration Part Two: As our colleagues Mackenzie Eaglen and Dustin Walker have explained, the current House GOP plan to raise the debt ceiling, the “Limit, Save, and Grow Act,” is akin to a Budget Control Act 2.0 in that its potential cuts to defense spending over time would result in reduced readiness, a smaller force, and deferred modernization. While this plan is only a starting point for negotiations, it should be noted that there are probably some elected leaders who believe cutting defense, like we did with the Budget Control Act in 2011, is not a bad idea. And given the thin margins in the House and Senate, we cannot wish away defense cuts even though the Speaker’s negotiating team now seems to be pushing for increased defense funding.

A bad debt ceiling deal that cuts defense would have real implications for the readiness of our force, which is already suffering from shrinkages in people, planes, and ships. Since its recent peak in the late 1980s, our force has been reduced by 40-50 percent; any cuts will certainly shrink the force even more.

So, as the Republicans and the White House hammer out a deal, what should it look like for defense?

First, any deal should exempt funds supporting Ukraine from spending caps. The reason for doing so is simple: in Ukraine, we are degrading a strategic competitor’s capability and capacity for relatively little cost in terms of dollars and, most importantly, American lives. Moreover, we are helping to ward off an existential threat to Europe, the original strategic priority for the United States. If we allow Russia to conquer Ukraine, we certainly are going to spend more to defend the rest of Europe and, should China view us as willing to abandon partners, on the defense of Taiwan. Spending money on what Ukraine needs to win now will save money in the long run.

Second, a deal over the debt limit should not cut defense from current levels and should probably stabilize defense at a level higher than 2023. Additionally, the budget deal should protect our national security from the scourge of inflation. That’s due to the need for at least $21 billion to account for the buying power that the Pentagon has lost from inflation since the start of Fiscal Year 2021 [PDF]. If we can settle on a topline in 2024 that allows the Pentagon to plan for the next decade, this in and of itself will be a net positive accomplishment.

Lastly, a deal should have an escape hatch. The world is watching, especially China and Russia. While we often view a budget and debt ceiling deal through the lens of internal politics, there are others who will be spending every waking hour to figure out how to exploit such a deal to their advantage. The “great game” of centuries past is still alive and well today; the locations and players have just changed. Therefore, there should be a way for our elected leaders to respond quickly to global and domestic emergencies, while also providing assurance to our allies and competitors alike that we are not abandoning the world stage.

It has been said that preparing for war is expensive, but as others have pointed out, it is much less expensive than fighting a war, and certainly much less expensive than losing a war. The current debt ceiling negotiations need to come to a successful conclusion, so that we never test this theory.

Retired U.S. Army Maj. Gen. John Ferrari is a senior nonresident fellow at the American Enterprise Institute think tank. Ferrari previously served as a director of program analysis and evaluation for the Army. Charles Rahr is a research assistant at AEI.