The federal government’s $14.3 trillion debt ceiling could be reached shortly. Already there is debate as to whether the ceiling should be raised and how high the debt limit should go.
The debt ceiling is a limit set by Congress beyond which the national debt cannot rise. So it is a limit on government borrowing, not a limit on government spending.
Therefore, the debt ceiling refers to funds used to pay debts the government has already incurred, on items like Treasury Bonds and other financing. Congress first imposed a national debt ceiling in 1917, following the passage of the Second Liberty Bond Act.
According to the Congressional Research Service, the debt ceiling was $5.5 trillion in 1996, held steady at $5.95 trillion from 1997 through 2001, then started increasing every year since, with the exception of 2004, when the ceiling remained unchanged from the previous year.
“If we hit the debt ceiling, since we don’t have enough money coming in to pay our bills, the federal government would stop paying their obligations and go into default,” said Douglas Rice, president of the Institute for Financial Planning Education in Castro Valley, Calif. “For the very short term there are some things that the federal government can do to keep things going, but that isn’t sustainable very long. While that would be a financial calamity of epic proportions, really horrible things can happen well before that.”
Others scoff at the notion that failing to raise the debt ceiling would necessarily cause financial calamity, and can point to President Obama for support.
As a U.S. Senator in 2006, Obama called an $8 trillion national debt “a sign of leadership failure” and voted against raising the debt ceiling.
The Center for Fiscal Accountability at Americans for Tax Reform has sent a letter to House Appropriations Committee Chairman Hal Rogers (R-KY) urging him to include language in the Continuing Resolution for the rest of Fiscal Year 2011 that would require the Treasury Department to service debt before paying any other obligations.
“Prioritizing debt service allows lawmakers to correctly focus on the cause of the debt: out-of-control government spending,” said Mattie Carrao, government affairs manager at Americans for Tax Reform. “The recent CBO report showed spending is projected to vastly outpace revenues over the next decade, even though tax receipts are projected to level out one percentage point higher than their traditional average. Thus, the country will be in a perpetual race against the debt clock if significant reform is not implemented.”
“Americans really do want a government that can live within its means. But that is not what Obama is offering,” said Bill Wilson, president of Americans for Limited Government. “If his budget is not brought under control soon, it will reduce the standard of living for every American family. When the house of cards comes tumbling down, the dollar will collapse, interest rates and taxes will soar, and it will be perfectly clear that the debt cannot be paid.”
Those who believe the choices are raise the debt ceiling or default note even the hint of default can mean lower debt ratings, leading to higher interest rates on borrowed money. Seth Zalkin, management partner for the Astor Group, New York, estimates a 1 percent increase in interest rates would mean an additional $500 billion in annual costs.
“There is a significant concern that even talking about this is risky as even the hint of not paying the obligations of the federal government could cause selling of our existing Treasury debt, which would increase interest rates,” said Rice. “With a fragile economic recovery still trying to find sound footing, higher interest rates would likely send us back into recession. And that could happen well before the deadline to raise the debt ceiling if the bond market feels the gridlock on Capitol Hill is going to result in a game of political chicken on this issue.”
Others, however, question the effect of a credit rating downgrade because the credit rating agencies themselves have come into questions as a result of the financial crisis.
“Some would have you believe that if the U.S. doesn’t increase the [debt ceiling] that it will affect the U.S. credit rating; an interesting observation particularly when the rating agencies are only appendages of the very same banking system that issues, distributes and sells the very debt that is said to be at risk for being downgraded,” said Curtis Greco, analyst and founder of The Imperfect Messenger Foundation in Santa Rosa, Calif.
“Moreover, to think that the investors and global debt holders are ignorant to the spending habits of the U.S. government is to place far too much credibility on the rating agencies and the Fed and far too little faith in the value of observing the obvious,” Greco added. “Clearly the debt holders are going to see that the U.S. is increasing its debt ceiling and will not be deluded into thinking that the nation’s credit rating has suddenly improved simply by increasing its debt load.”
Greco said a further increase in the debt ceiling would relieve Congress of the need for fiscal discipline and accountability and relieve the President of “culpability relating to failed budget discipline.”
Indeed, the Congressional Research Service in its 2010 report on the debt limit, said: “The debt limit also imposes a form of fiscal accountability that compels Congress and the President to take visible action to allow further federal borrowing when the federal government spends more than it collects in revenues. In the words of one author, the debt limit ‘expresses a national devotion to the idea of thrift and to economical management of the fiscal affairs of the government.’”
“Congress can keep spending without increasing the national debt ceiling,” said Susanne Trimbath, CEO and chief economist for STP Advisory Services, LLC in Omaha, Neb. But if Congress keeps increasing spending, it will lead to more borrowing, leading to further requests to increase the debt ceiling. So before trying to rein in the debt ceiling, spending needs to be brought under control, Trimbath and many others agree.
“Congress needs to get its act together,” Zalkin said. “A lot of the focus has been on cutting discretionary spending, but that’s only a small part of the problem.”
Cuts to discretionary spending will reduce some of the debt, but obligations for entitlement programs like Social Security and Medicare are continuing to increase and comprise a much larger portion of federal expenditures than do discretionary programs, Zalkin explained.