Top 5 Things To Know About The Debt Ceiling

January 23, 2013

Today the House will vote on a measure that would temporarily suspend the federal government’s debt limit, known as the “debt ceiling.” Until the last two years, few Americans had heard this term:

  1. What Is The Debt Limit? Most consumers have credit cards with limits – the maximum amount he or she can borrow under the agreement with the bank. The U.S. also has a limit to what it can borrow to meet its spending obligations. That limit is called the debt limit. The Congressional Budget Office explains the limit is comprised of two main components: “debt held by the public and debt held by government accounts. Debt held by the public consists mainly of securities that the Treasury issues to raise cash to fund the operations and pay off the maturing liabilities of the federal government that revenues are insufficient to cover. Such debt is held by outside investors, including the Federal Reserve System. Debt held by government accounts is debt issued to the federal government’s trust funds and other federal accounts for internal transactions of the government.”
  2. What Is The Current Debt Limit? The current limit is $16.394 trillion. With the national debt close to $16.433 trillion today, the federal government has already exceeded this ceiling. To keep funding its obligations, the government is, well, it’s borrowing again, this time from future obligations. Morning Money explains the U.S. Treasury has halted investments in the federal Thrift Savings Plan, which is the pension plan for federal workers. Morning Money calls this act “borrowing.”
  3. How Many Times Has Congress Raised The Debt Ceiling? According to the U.S. Treasury Department, 78 separate times since 1960. 49 increases occurred under Republicans presidents and 29 fell under Democratic regimes.
  4. What Would Happen If Congress Didn’t Raise The Debt Ceiling? Good question and, according to The International Business Times on that “no expert can answer with certainty.” Some argue the U.S. would default on its obligations, which, according to the Council on Foreign Relations, would mean “limiting or delaying payments to creditors, beneficiaries, vendors, and other entities.” Programs affected could include “military salaries, Social Security and Medicare payments, and unemployment benefits.” Others say the U.S. would not technically default, meaning it could keep making interest payments on the debt. With the option the government would still have to “prioritize” other spending like funding for the Departments of Defense and Education and Social Security and Medicare. To go back to the credit card analogy, this option is kind of like paying the minimum balance while not adding to the total outstanding obligation – but, when funding an entire life on credit, this option could mean sacrificing food or shelter. Regardless, since several firms downgraded the U.S.’s debt rating last year after Congress’s prolonged debate over raising the ceiling (which still resulted in an increase), it’s likely the U.S.’s credit rating would take another hit.
  5. What Does This Week’s Legislation Do And What Are Some Long-Term Solutions? According to The Associated Press, the bill to be voted on today “would give the government enough borrowing leeway to meet three months’ worth of obligations.” The bill also includes a provision that says if the House and Senate don’t pass a budget, lawmakers paychecks will be escrowed – put in an account and saved for them – until they do. (Notably, it doesn’t require Congress to complete the budget process by requiring the House and Senate to pass the same budget). For the long-term, some lawmakers and economists want to get rid of the debt ceiling. Congress could also keep it in place and, of course, finally cut spending and reform the nation’s entitlement programs in order to keep from hitting the higher limits.

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