Oct. 14 (Bloomberg) -- The U.S. government reached the $7.384 trillion legal limit on how much it can borrow, forcing the Bush administration to shuffle funds among accounts and prompting fresh Democratic criticism of the president's economic policies.

To avoid exceeding the cap, the Treasury said it would temporarily suspend contributions to a government pension program. The department's plan to announce new debt sales in early November won't be affected. Congress isn't expected to increase the amount of debt the Treasury can sell to fund approved government spending until sometime next month.

``Given current projects, it is imperative that the Congress take action to increase the debt limit by mid-November, at which time all of our previously used prudent and legal actions to avoid breaching the statutory debt limit will be exhausted,'' Treasury Secretary John Snow said in a letter to congressional leaders.

With government at its borrowing limit, Democrats have a new way to criticize record budget deficits under President George W. Bush. The Congressional Budget Office said last week the deficit likely was $415 billion in fiscal year 2004, which ended Sept. 30. That exceeded last year's $374 billion shortfall, the previous record in dollar terms.

Political Issue

``The budget George Bush submitted to Congress in February 2001 promised that the debt ceiling would not have to be increased until 2008,'' said Jason Furman, an economic advisor to Democratic presidential candidate John Kerry. ``We could not have a more stark demonstration that George Bush is the most fiscally irresponsible president in American history.''

A spokesman for the Bush campaign, Brian Jones, declined to comment because ``this is nothing we have control over'' and referred a reporter to Snow's statement.

The debt ceiling covers about $3.5 trillion in publicly traded Treasury securities, plus savings bonds and borrowing from the Social Security trust funds and government pension funds. Congress imposed the first debt ceiling of $11.5 billion in 1917. It crossed the $1 trillion mark in 1981.

The need to raise the limit became a political issue during the Clinton administration, when then-Treasury Secretary Robert Rubin's budgetary maneuvers to avoid a breach led to calls for his impeachment.

Unsustainable

While Treasury must always sell debt to fund government operations until taxes are received, the rising deficit is forcing the Bush administration to ask the limit be raised for a third time in less than four years.

``This situation is not sustainable, and it undermines our ability to address long-term budgetary needs including the impending retirement of the baby boom generation,'' said Representative John Spratt, ranking Democrat on the House Budget Committee. ``Although the Administration tries to diminish the gravity of the problem, there is no way to dismiss debt ceiling increases that are $2.124 trillion and rising.''

The Senate voted in June 2002 and again in May 2003 to raise the ceiling by a combined $1.4 trillion. Both times Democrats delayed votes and used the debate to complain about Bush's budget record, tying the deficit to the president's $1.85 trillion in tax cuts.

November Vote

Senate Majority Leader Bill Frist, a Republican from Tennessee, said Oct. 8 that Congress would likely vote on a debt ceiling increase by mid-November.

``We will be addressing it adequately and the markets have nothing to worry about in terms of our appropriate response,'' Frist told reporters.

In 2002, the Treasury postponed a two-year note auction as it waited for Congress to act, and in May 2003 it delayed announcing the details of a two-year note auction.

The department is scheduled to sell three-, five- and 10- year notes on Nov. 8, 9 and 10. The government will also sell two- year notes on Oct. 27 and five-year Treasury inflation-protected securities on Oct. 26.

The ``Treasury does not expect the date of the next quarterly refunding announcement to change based on the debt ceiling at this time,'' Treasury spokeswoman Brookly McLaughlin said.

Market Effects

``If interest rates rose because the bond market got spooked about this, that might raise some concerns,'' said Stan Collender, a managing director of Financial Dynamics Inc., a Washington consulting firm. ``But the general attitude of the market is that Congress will take care of this without damaging the government's creditworthiness.''

Treasury officials postponed announcing the details of the May two-year note offering in 2003 because Congress didn't immediately boost the limit on borrowing, then $6.4 trillion. The Senate voted in June 2002 and again in May 2003 to raise the debt ceiling by a combined $1.4 trillion.

The $25 billion auction was announced May 27, 2003, five days after the scheduled date. Two-year notes climbed that month, with yields falling 0.16 percentage point.

Prior to releasing Snow's letter, the Treasury said it will sell $20 billion of three-month bills and $18 billion of six- month bills on Monday.

Treasury Strategy

To avoid a breach in the past, the Treasury suspended payments to the Civil Service Retirement and Disability Fund, the Federal Retirement Thrift Fund and temporarily stopped issuance of State and Local Government securities. It later repaid the accounts with interest. Those steps were first taken by Democrat Rubin when the government hit the borrowing limit in 1995 and early 1996.

Today, Snow said the Treasury would postpone payments to the thrift fund. Also known as the G-Fund, it contains around $56 billion. Beneficiaries of the fund ``are fully protected and will suffer no adverse consequences from this action'' with the money repaid with interest once the debt limit is raised, Snow said in his letter today.

Such maneuvering might free up an additional $84 billion, keeping the U.S. under the debt limit through mid-November, according to Merrill Lynch & Co. government strategist Joseph Shatz and economist Kathleen Bostjancic.

No Default

During the debt ceiling debate in 1996, Moody's Investors Service placed U.S. debt ``on review for possible downgrade,'' and in June 2002, Moody's said some Treasury securities might be reviewed for possible downgrade if Congress failed to raise the borrowing limit.

Earlier this month, Snow pledged that no matter what, the government would pay its debts.

``The Treasury will avoid a default,'' he said in an Oct. 8 interview.

Federal Reserve Chairman Alan Greenspan and Snow have both called in the past for Congress to eliminate the debt ceiling, noting lawmakers determine the amount of debt that must be sold when they approve government spending measures.

To contact the reporter on this story: Brendan Murray in Washington at brmurray@bloomberg.net.

Last Updated: October 14, 2004 12:04 EDT