Holding debt limit hostage won’t fix spending problems, former CBO director warns

As the clock winds down before the U.S. reaches its debt limit, Republicans and Democrats are fighting over the federal debt cap – with the GOP using the fiscal fight to push for measures to combat government spending.

A former Congressional Budget Office director is voicing his concerns over the Congressional battle, specifically with respect to the GOP emphasis on limiting spending.

"Let's not kid ourselves that holding [the debt limit] hostage is somehow going to make performance better on the spending side. It hasn't historically," Douglas Holtz-Eakin said on "Cavuto: Coast to Coast" Tuesday. 

Holtz-Eakin added that, while he agreed something needs to be done about government spending, those talks should be saved for spending bills.

$31.4T GOVERNMENT DEBT LIMIT CLOSE TO MAXING OUT

"I'm with the folks who are saying we've got to get the spending under control. It's true that the budget outlook is unsustainable and the growth is on the spending side. So that needs to be dealt with," he said. "Have a good fight on the spending. Just don't do it with the debt limit."

The Treasury Dept. announced Friday that the U.S. will officially reach its debt limit on January 19th, at which point it will have to begin using accounting tools known as "extraordinary measures" to fund federal obligations until at least early June to stave off the threat of default. Once those measures are exhausted sometime this summer, Congress will have to act by either raising or suspending the debt limit.

"Have a good fight on the spending. Just don't do it with the debt limit." - Douglas Holtz-Eakin

"Failure to meet the government’s obligations would cause irreparable harm to the U.S. economy, the livelihoods of all Americans, and global financial stability," Yellen said in a letter to Congressional leaders. "I respectfully urge Congress to act promptly to protect the full faith and credit of the United States."

Holtz-Eakin emphasized the importance of raising the debt ceiling before defaulting. 

"There's no disagreement about the need to raise the debt ceiling," he told host Niel Cavuto. "I mean, the US needs to raise the debt ceiling, or it will inevitably default. And that would cause all of the repercussions that Secretary Yellen's worrying about in the financial stability of literally the world financial system, the outlook for the economy, and just a horrific downgrade for the United States. So that's unthinkable."

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While the U.S. has never defaulted on its debt before, it came close in 2011, when House Republicans refused to pass a debt-ceiling increase.

The 2011 debt ceiling crisis featured the first-ever downgrade of America's credit rating, as Standard & Poor's (S&P) cut the rating from AAA (outstanding) to AA+ (excellent). Such credit downgrades can potentially raise governmental borrowing costs, although the other major rating agencies Moody's and Fitch kept the U.S. at AAA.

When discussing the 2011 crisis, Holtz-Eakin warned Congress should not "risk" the U.S.' global status by toying with the debt ceiling and putting the country in a position to downgrade.

"Every time there's some sort of crisis on the globe, the money flows to the U.S. We are perceived to be the safe haven, the place that has the capacity politically to control and deliver on its liabilities," he said. "And if you lose that, and that downgrade was a comment on our governance or our ability to manage our financial future, that's a huge loss. It affects borrowing costs. It affects capital flows. They're going to go elsewhere, not to the U.S. So that's something that we really should not want to risk."

The 2011 impasse was eventually resolved when Republican holdouts agreed to raise the borrowing limit in exchange for automatic spending caps known as "sequestration." 

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Sequestration applied across the board to discretionary spending on defense and non-defense matters, whereas mandatory spending on programs like Medicare and Social Security was exempt. 

"If you look at the record of debt ceiling increases or suspensions… and you look at those that came with some sort of fiscal controls and those that were clean increases, they didn't affect the trajectory of the debt," Holtz-Eakin explained. "The debt has gone up regardless, and it's because they haven't dealt with the underlying spending programs."

The former CBO director pleaded that Congress work to raise the debt limit first and then work to tackle the "serious issue" of government spending.

Holtz-Eakin explained that the talks circulating spending and the debt are discussions that are "devoid of the reality of what's the big spending number."

"Well, it's entitlements. And how do you deal with it? Well, you deal with it on spending bills, not with the debt ceiling."

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As Congress works to avoid Thursday's financial Armageddon, Holtz-Eakin shares what he believes is the "recipe" for resolution.

"There has to be a way out that allows the debt ceiling to go up, and a commitment to control future spending has to be put in place. That's the recipe."

FOX Business' Eric Revell and Megan Henney contributed to this report.