In most years the federal government brings in less revenue than it spends. To cover this difference, the Treasury Department has to issue government bonds which increases the national debt. The debt limit is legislative restriction on the total amount of national debt the Treasury is authorized to borrow to meet its existing legal obligations.
What is the current debt limit?
The current statutory limit on total debt issued by the Treasury is just under $16.7 trillion.
Shouldn’t we want Congress to refuses to raise the debt ceiling since it will lower our national debt?
The debt ceiling does not lower the national debt. The legal obligation to pay the debt has already been incurred by the government so the money is already owed. Refusing to raise the debt ceiling merely prevents the Treasury Department from borrowing money to pay the government’s bills.
When will the government run out of money to pay its bills?
The current estimate is October 17, 2013.
What happens when the government doesn’t have money to pay its bills?
As Brad Plumer explains, “The most straightforward scenario is that the government’s computer systems would keep making payments until its checks started bouncing. And its hard to predict in advance who would get stiffed.”
Every day the Treasury Department receives more than 2 million invoices from various agencies. The Department of Labor might say, for example, that it owes a contractor $1 million to fix up a building in Denver. The Treasury computers make sure the figures are correct and then authorize the payment. This is all done automatically, dozens of times per second.
According to the Treasury Department’s inspector general, the computers are designed to “make each payment in the order it comes due.” So if the money isn’t there, the defaults could be random.
What happens if the debt ceiling isn’t raised and Treasury can’t pay the government’s bill?
The result is that the government will default on its payments, that is, people owned money by government stop getting paid. Each month the government only brings in about 68% of the revenues needed to pay the bills. Some people would get paid but others would not, which could cause Americans and the rest of the world to wonder if the U.S. is serious about meeting its financial obligations. That could precipitate a global financial crisis
If the consequences are so dire, why doesn’t Congress just raise the debt ceiling already?
In a word, politics. As Kevin Hassett and Abby McCloskey of AEI note, Congresses run by both parties have used the borrowing limit as political leverage with a president. All told, congressional Democrats have been responsible for 60% of the increases when the debt limit was raised alongside other legislative items. Republicans were responsible for 15%. The remaining 25% occurred during divided Congresses. Of the Democratic dirties, six occurred when Democrats also controlled the White House, and 10 occurred when a Republican controlled the White House. For Republicans, all four occurred while a Democrat held the presidency.
Why do we even have a debt ceiling?
The United States has had some sort of legislative restriction on debt since 1917. But there is nothing in the Constitution that requires it and it makes little sense for Congress to separately authorize borrowing for spending that Congress has already approved. While many economists and politicians have suggested eliminating the debt limit requirement, no serious proposal to remove it is being considered. It likely won’t be as long as it can be used as a political tool.
Will we actually default on our debt?
Probably not. Congress and the President will likely come to some agreement. Back in 1979, the government inadvertently defaulted on about $122 million worth of Treasury bills, and while the error was quickly fixed, the incident raised the nation’s borrowing costs by about 0.6 percent, or $12 billion. Most members of Congress recognize that if a minor default could have such devastating consequences, the affect of a real default could be catastrophic.