The debt ceiling or debt limit is a restriction imposed by Congress on the amount of outstanding national debt that the federal government can have. Kavan Choksi points that debt ceiling basically is the sum that the Treasury can borrow in order to pay bills that have become due, as well as pay for future investments. If the debt ceiling is reached, the federal government would not be able to increase the amount of outstanding debt. Hence, they shall end up losing the ability to pay bills and fund programs. The Treasury, however, may utilize certain Congress authorized extraordinary measures to suspend certain intragovernmental debt temporarily. This shall allow it to borrow money to fund programs or services for a limited period of time even after it has reached the ceiling.
Kavan Choksi offers an overview of the United States debt ceiling
Every year, the United States government gets revenue from taxes and other streams like customs duties. However, it ultimately spends more than it gets. This leaves the government with a deficit. The deficit amount has ranged from $400bn to $3tn each year over the last decade. The deficit amount left at the end of the year gets added on to the total debt of the country.
In order to borrow funds, the US Treasury issues securities like the US government bonds, which it eventually pays back with interest. As the US government hits its debt limit, the Treasury would not be able to issue any more securities. This would stop an important flow of money into the federal government.
Congress is in charge of setting the debt ceiling. This limit has been raised 78 times since 1960, under both Republican and Democrat Presidents. There have been times when the debt ceiling was suspended for a brief period, and subsequently reinstated at a higher limit. As the United States has never defaulted on its obligations, the scope of the negative impact associated to a default is unknown. However, it is quite likely to have catastrophic repercussions in the United States and in markets across the globe. As per Kavan Choksi, investors may lose faith in the US dollar, which would cause its economy to weaken faster. Job cuts would also be imminent, and the federal government of the United States shall not have the means to continue all its services. Mortgage rates are also likely to go up significantly, thereby tanking the housing market.
The largest chunk of the US government spending goes to mandatory programs, like Medicare, Medicaid and social security. These programs comprise nearly half of the overall annual budget. Military spending takes up the biggest chunk of discretionary spending. Various other big-ticket items include spending on employment training, education, as well as benefits for US veterans. The United States has had at least some amount of debt throughout its history. However, this debt really started to grow in the 80s, with Ronald Reagan’s huge tax cuts. Due to the lack of substantial tax revenue, the government had to borrow more money.
