RUTHFULLY YOURS

When the debt limit expires later this year, it will provide one of the few remaining opportunities to slow the Obama administration’s expansion of government. The $831 billion 2009 stimulus package has morphed into trillions of dollars of permanent debt, with growth and jobs losing out.

Republicans should propose constructive restraint. If their proposals are rejected, they should allow the House to vote on another short-term increase in the debt limit while insisting that Democrats provide almost all the votes for bigger government.

On their present course, spending and debt are forecast to rise sharply starting in 2015, even with severe underfunding of national defense. Government health-care spending will more than double over the next decade to $1.8 trillion annually in 2023, while annual debt-service costs will quadruple to $823 billion as interest rates normalize.

Over the last century, government’s fiscal machinery has been mostly gas pedal, little brake. In 1913, the 16th Amendment gave Washington open-ended power to tax income and borrow against it, with no offsetting restraint on spending or debt.

Constitutional limits on the scope of federal activity have gone unenforced. Automatic entitlement spending sidesteps the constitutional requirement that “No money shall be drawn from the Treasury, but in Consequence of Appropriations made by Law.”

Going a step further, Congress has embedded the Consumer Financial Protection Bureau inside the Federal Reserve, giving it access to limitless funding (up 80% from 2012 to 2013, reaching over $500 million) and no congressional control over spending, mission creep or staff. CFPB unionized on May 9 and is expected to have over 1,500 employees in 2014, double the number in 2012.

This leaves the debt limit as the critical legislative vehicle to provide restraint.

The debt-limit process is deeply flawed, however, because spending commitments are made before a vote to raise the ceiling. The process should be replaced with legislation establishing continuous spending restraint that escalates when the debt-to-GDP ratio rises above a ceiling. But President Obama, in his budget proposals, goes in the other direction, toward more spending and debt regardless of the debt-to-GDP ratio.

The president also has the upper hand. He can argue that the money has already been spent, the deficit is declining, and obstructionists are hurting the economy. When federal payments begin to push debt over the limit, the president can orchestrate a selective shut down of government that would be politically poisonous for Republicans. This doesn’t leave enough leverage to force major changes in ObamaCare or negotiate much-needed tax reform.

The best chance of restraining the buildup in national debt is for Republicans to create a menu of reasonable restraints on spending and debt and insist that the president also propose restraints. Instead Mr. Obama has pushed for a “grand bargain” that includes higher taxes. But that just locks in bigger government. It would harm the growth outlook, whereas a movement toward spending restraint would launch faster growth by lowering the future tax burden.

The menu should include procedures to slow the growth in entitlement spending. These could include a higher retirement age and two changes in the inflation formula, progressive indexing to limit the current escalation in the initial Social Security payments and chain-weighted CPI to slow the excessive compounding in the annual Social Security inflation adjustments.

Changes made now, even if they take effect in several years, would have immediate economic and market benefits by improving the debt outlook.

Also on the menu should be steps to make the debt limit more honest. In recent years, the Federal Reserve has incurred extra debt by buying higher coupon Treasury bonds at a premium. The statutory debt only includes the face value of Treasury bonds (say $100), but the Fed may have had to borrow $105 to buy the bond because yields have fallen since it was issued. The debt limit should reflect the cumulative premiums—already $200 billion and climbing fast—that the Fed includes in its liabilities.

The Treasury is planning to issue a new type of debt, floating-rate notes, that will cause a further understatement of the nation’s fiscal burden. The notes will hold down the fiscal deficit in the short-term, benefiting current politicians because at first they would carry marginally lower interest rates than fixed-rate debt. But when interest rates rise, so too will interest payments on those floating-rate notes. Debt will go up faster than if Treasury had issued fixed-rate debt.

The debt limit should also consider the burden the Fed is creating for future taxpayers by buying longer-term Treasurys with trillions of dollars in short-term Fed IOUs called excess reserves. The practice, unprecedented before 2008, also will escalate the deficit, and thus the national debt, when interest rates rise. That’s because the Fed pays a floating interest rate on these IOUs.

Without appropriate controls in the debt limit—such as a five-year floor on the effective maturity of the national debt that also takes into account floating-rate debt and the Fed’s debt—Washington will be tempted to expand these practices rapidly. That would lower current interest expense at the risk of future deficits and debt, precisely the concern the debt limit is meant to address.

Mr. Obama won’t like these restraints, and he may decline to offer pro-growth alternatives. The Republicans need to have a stronger fallback position than the February debt-limit increase, which required the Senate to produce a budget or have Senate salaries withheld. The result of this no-budget, no-pay law was a prompt but meaningless Senate budget and lots more debt.

If the president rejects improvements in the debt limit, a plausible strategy for House Republicans is to permit a vote on a short-term increase, but only provide a small number of GOP votes. The Democrats would need to provide the majority and would be accountable to the electorate.

The sought-for result is that the Democrats tire of repeatedly voting by themselves for more debt and encourage the president to help restrain spending growth. The upside for growth, jobs, the dollar and financial markets is huge if Washington finds a process to slow the growth in spending and debt.

Mr. Malpass is president of Encima Global LLC. He served as deputy assistant Treasury secretary in the Reagan administration.

A version of this article appeared August 30, 2013, on page A13 in the U.S. edition of The Wall Street Journal, with the headline: A Debt-Ceiling Strategy for the GOP.