What and How Much is the Debt Ceiling?
As citizens of the United States, we try to be good stewards of our own personal finances. In so doing, we are aware of the credit limit(s) on our credit card(s). We try not to exceed the credit limit determined by the bank. However, if we approach our credit limit, we call the bank and ask for an increase in our credit. If the bank denies the increase, we have to do without. If the bank increases the credit limit, we can make our purchase but we increased our debt. However, we still have to pay for this purchase in the future. On a personal level, we hope to earn enough income to pay off this debt increase. We cannot default and not pay the bank.
Now, let’s put the in terms of the U.S. financial system. First, the debt limit has nothing to do with the existing U.S. budget. The debt limit allows the government to finance existing legal obligations that both parties, Democrats and Republicans, made in the past. According to the U.S. Department of Treasury, the debt limit is, “the total amount of money that the U.S. government is authorized to borrow to meet its existing obligations, including Social Security and Medicare benefits, military salaries, interest on the national debt, tax refunds, and other payments.”
In January 2023, the debt limit was $31.4 trillion. Since 2001, the U.S. government has incurred a deficit average of almost $1 trillion per year. The deficit means that more money is being spent than received in taxes and other revenue. In order to make up the difference, the government must borrow to continue to finance payments the Congress and president have already approved. Does this sound like our personal scenario above?
Once the debt limit is reached, and Congress or the President does nothing to enact a new increase, a catastrophic economic crisis is eminent. According to PBS.org, “once the debt ceiling is reached, decisions will have to be made about who gets paid with daily tax revenues. Further borrowing will not be possible. Government employees or contractors may not be paid in full. Loans to small businesses or college students may stop.” This is because the government will be in default. This will result in an increase in interest rates, panic in the financial markets, and maybe, just maybe, economic depression.
The Politics of the Debt Ceiling
The debt ceiling was created by Congress in 1917. Since 1960 the debt ceiling had to be raised 78 times, most recently in 2021. Of these increases, 49 were implemented by Republican administrations and 29 were under Democratic administrations.
The “X-date” is the date at which the government surpasses the debt limit. There is no historical precedent for the government passing the “X-date.” There is a relief valve that allows Congress to suspend the debt limit, or temporarily allow the U.S. Treasury to supersede the debt limit. It does this in lieu of raising the debt ceiling by a specific amount. Since 2013, Congress has suspended the debt limit seven (7) times.
The parties remain divided over how to tame the budget and bring the deficit down. This would avoid reaching the debt limit altogether. The Democratic Party relies upon increasing taxes on the wealthy to pay for “necessary” governmental programs. The Republican Party relies upon lowering taxes and government spending on “unnecessary” programs.
So, where is the in-between? The line between “necessary and unnecessary” programs? The current fight exists between President Biden and Republicans based upon budget cuts. Republicans wants to negotiate the debt ceiling by cutting programs and costs. Republicans have openly said that unless the Democratic Party addresses lowering the costs of these programs, they will not negotiate the passage of a new debt ceiling. President Biden has made it clear that the debt ceiling should never be held hostage to the budget process. Yes, we are at an impasse.
What is clear is that all former presidents, Democrat or Republican from Reagan to Trump, agreed that the debt ceiling is a separate activity and should not be part of the budget process. These are two very different sides of the same coin. They all agreed that the U.S. economy would fall off a cliff should the debt limit be breached and no relief valve is implemented.
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