What Is a Debt Ceiling, and Why Does It Matter?

Published October 31st, 2017 - 12:51 GMT
What is a debt ceiling, and why does it matter? The answer in this article. (Shutterstock)
What is a debt ceiling, and why does it matter? The answer in this article. (Shutterstock)

The U.S. Congress votes on the expenses and revenues of the government, with members often taking center stage to tout their support for favorite items. But when it comes to actually paying the bills, it can get a little complicated.

The legal limit on how much debt the federal government can take on is called the debt ceiling. It’s a good bet it will be in the news again soon.

Congress caps the amount of money that the federal government can owe even while passing budgets that spend more than they take in. Each year that gap, or deficit, is added to the total debt of the country.

The federal government will have enough money to pay all its bills until December 8 under a measure that Congress passed and President Trump signed into law in September.

But without another increase in the debt ceiling, the U.S. will not be able to pay its bills and risks bringing the nation to the brink of default by March 2018, according to the Bipartisan Policy Center, a Washington-based organization containing former congressional members of the two main U.S. political parties.

If the government actually ran out of money without Congress acting, it would mean vendors and individuals not getting paid. People who buy U.S. bonds or other types of debt issued by the federal government would worry about their investment, likely causing upheaval in the financial markets.

“The one thing that’s crystal clear is, we want to avoid it happening,” says Alan Viard, resident scholar at the American Enterprise Institute.

Stan Collender, a budget expert and executive vice president of Qorvis MSLGROUP, said the U.S. system where lawmakers approve spending separately from the borrowing needed to pay for it is unusual. “That’s different from most other countries.”

Each time the nation gets close to the debt ceiling, the Treasury Department uses accounting and other maneuvers to avoid defaulting on its debts. Eventually Congress agrees to either raise the ceiling or suspend it for a while. Before the latest extension, Congress had voted 78 times to allow more borrowing, according to the Treasury Department.

Congress started debt-limit votes with the Second Liberty Bond Act in 1917, which helped finance the country’s entry into World War I. In 1939 it combined bonds and other types of debts under one $45 billion ceiling.

Some people would like to get rid of the debt ceiling so Congress doesn’t repeatedly get tied up in knots over actually paying the bills for spending it already has approved. But others see the debt ceiling as a check on spending since it requires Congress to publicly take a vote on spending more money than it takes in.

Donald Ritchie, historian emeritus of the U.S. Senate, says the impact of a debt default that might halt government services is serious.

“The public expects government to operate,” Ritchie said. “They expect their Social Security checks, the [national] parks to be open, the phone lines to be answered.”

By Tamara Lytle

Source: ShareAmerica

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