Here we go again. It was just over two years ago when Congress fought about increasing the nation’s borrowing limit. After that battle, ratings agency Standard & Poor’s downgraded the credit rating of the United States by one notch and the S&P 500 stock index subsequently dropped by more than 17 percent. Two years later, the economy and markets are in better shape, but that doesn’t mean that a fiscal battle would be welcomed by anyone. Right now, Congress is fighting over two issues: the funding of the government and the looming debt ceiling. The country is expected to reach its current $16.7 trillion debt ceiling in mid-October. Both sides have drawn their respective lines in the sand, which means that we should prepare for “Debt Ceiling, Part Deux”!
A quick primer on a few basics:
- $1 trillion = $1,000 billion or $1,000,000,000,000 (that's 12 zeros)
- Annual surplus/deficit = money government takes in minus the money government spends. If the number is positive, there is a surplus; and if it’s negative, there is a deficit
- FY 2012 US deficit = $1.1 trillion
- FY 2013 budget deficit = $973 billion when proposed, but in its mid-year update, the Congressional Budget Office (CBO) said the deficit is expected it to drop to $642 billion
- National debt = Total amount borrowed over time to fund the annual deficit
- Current national debt (as of August 1) = $16.7 trillion (or $52,943 per for every person living in the US or $138,240 per taxpayer)
- The U.S. national debt has more than doubled since the year 2000. In May, CBO projected that the FY 2013 deficit would be $642 billion, or 4 percent of GDP. That is down from a deficit of 10.1 percent in 2009
- Debt ceiling is the maximum amount of debt that Congress allows for the government. The current debt ceiling is $16.7 trillion, effective January 31, 2013
- The U.S. government has to borrow 43 cents of every dollar that it currently spends, which is four times the rate in 1980
As the battle on the debt ceiling nears, it’s important to underscore that Congress has already agreed to spend a certain amount of money, by virtue of the annual budgets that come to the floor for a vote. After budget resolutions are passed, if the government cannot meet its obligations from revenue, it borrows money by selling bonds. Increasing the debt limit does not authorize new spending commitments; rather it allows the government to finance existing obligations that Congresses and presidents have made.
The concept of a debt ceiling goes back to the early 20th century. During World War I, Congress put a limit on federal debt so that the Treasury would have more discretion over borrowing. In the 1930s, Congress moved towards aggregate constraints on federal borrowing that allowed the Treasury greater ability to respond to changing conditions and more flexibility in financial management.
For decades, lawmakers increased the debt ceiling as a course of business. Since 1960, Congress has acted 78 separate times to permanently raise, temporarily extend, or revise the definition of the debt limit under both Republican and Democratic presidents.
What happens if there is no deal to increase the debt ceiling? Without sufficient funds to pay the bills, the government must decide which payments come first. During the 2011 debt ceiling kerfuffle, the Administration said that it would pay the interest on its debt, Social Security benefits, Medicaid and Medicare payments, unemployment benefits and salaries for military personnel in action. Other areas, like salaries of “non-essential” federal workers, Pell grants for college students, highway construction and education programs might all have to wait.
Additionally, ratings agencies would take a dim view on a protracted fiscal fight. The big difference between the last time this occurred and today is that interest rates have already begun to rise. Worries that the government battle would persist could push yields even higher, worsening the deficit problem by increasing required interest payments on the debt.
Now that you are an expert on the debt ceiling, maybe you can more confidently reach out to your congressman/woman to urge them to make a deal on the debt before we hurtle off the fiscal cliff once more.
© 2013 TRIBUNE MEDIA SERVICES, INC.