Debt Ceiling 101


The debt ceiling fight is shaping up to be the political fight of the year. The Republican party is holding us hostage! Our creditors will abandon us! We'll get a bad rating from Standard & Poor's! Whatever that means.

Wait, what does this stuff mean? Following is the Prospect's humble attempt to answer your basic questions about the debt-ceiling fight.

What is this clock counting down to?

The clock counts down to the day when we'll reach our debt ceiling unless we vote to raise it. Lots of folks seem to agree this will happen about May 16.

What is national debt?

In order to keep the government functioning, the Treasury Department borrows money by selling Treasury bills, notes, bonds, and saving bonds to the public. The public includes individuals, corporations, state or local governments, and foreign governments. The national debt is the amount that the United States government holds in these liabilities -- it is literally the amount that the U.S. government owes to the public for their bills, notes, and bonds.

In March, the national debt totaled just over $14 trillion. The Congressional Budget Office (CBO), Government Accountability Office (GAO), and the Office of Management and Budget have found that absent policy changes, the debt held by the public will become unsustainable.

What is the debt ceiling?

The debt ceiling is the maximum amount of money that the government can borrow to issue payments for programs such as Social Security, military salaries, Medicare benefits, and tax refunds. The debt-ceiling was created in 1917, and it was intended to eliminate the need for yearly congressional approval on issuing debt. In the past 10 years, however, Congress has voted 10 times to raise debt limits.

The debt ceiling is currently set at $14.294 trillion. At the end of March, we had $76 billion left for making debt payments. Once the debt ceiling is reached, the government can't make new spending committments.

Why should you care?

If the threat of global economic meltdown isn't enough, all of this means the federal government might not pay you the money you're owed in the form of tax refunds, Social Security checks, paychecks for the military, or Medicare benefits.

Why do we vote on it?

Until recently, the House of Representatives automatically passed a resolution with the budget that changed the debt limit in the budget bill. In 1974, the Congressional Budget Act established a new procedure requiring separate legislation to pass the debt limit. This was passed so that Congress could debate the status and trajectory of the federal debt.

Why don't other countries have it?

Only Denmark has a fixed debt limit comparable to that of the U.S. There, the debt limit is raised through legislation in a separate action from the annual budget process. In Denmark, however, the debt limit is set at a level so high that the ability of debt managers to issue payments is not inhibited.

The congresses of other countries such as Canada and Sweden approve borrowing authority, but it is in connection with the approval of annual budget decisions.

The United Kingdom, New Zealand, and other countries delegate even broader authority to their treasury departments to borrow in the public interest. But because these countries have parliamentary systems of government, issues such as borrowing money to fund the government usually require significantly less deliberation.

Will we ever get rid of it?

Experts -- including former Office of Budget and Management and Treasury officials, congressional staffers, and CBO employees -- have suggested in the past, and are suggesting now, replacing the debt ceiling with debt targets for lawmakers to work under. Such targets are used by many European countries and would increase the Department of Treasury's influence over fiscal policy decisions that increase national debt. Targets could be implemented by, for example, measuring debt in relation to the overall size of the economy, such as in a debt-to-GDP ratio, and taking into consideration whether the economy is in a period of expansion or contraction.

Another option being debated is following the lead of other countries and raising the debt level simultaneously with the budget, as was done before the 1974 Congressional Budget Act. This would limit Congress' ability to debate the maximum level of debt but would refocus the debate on spending levels for each fiscal year.

Got more questions? Leave them in the comments section, and we'll see what we can do.

Sources: The Government Accountability Office and the U.S. Treasury