NRCC Policy Primer: Dancing on the Debt Ceiling
As a child, I was fascinated by the Lionel Richie Music Video “Dancing on the Ceiling.” How did they do that? Why aren’t there more keytars nowadays? Why does Rodney Dangerfield randomly appear at the end? If this doesn’t qualify for respect, I don’t know what does.
Anyway, there’s been a lot of talk recently a very different, but equally (nearly?) important, type of ceiling…the Debt Ceiling.
What’s the Debt Ceiling?
Glad you asked. That’s why I’m here. In short, the Debt Ceiling, formally known as the Statutory Debt Limit, is the maximum amount of money the federal government is allowed to borrow without receiving additional borrowing authority from Congress.
Can you explain why the federal government has debt in the first place?
Sure, but first, you need to know a little bit about government financing and the difference between deficit and debt.
The Federal Deficit and the National Debt are two different things, but they are related. The deficit is the annual difference between what the federal government takes in from taxes and other revenues, called receipts, and the amount of money the government spends, called outlays.
When the federal government spends more than it takes in during a fiscal year, it results in a deficit. Deficits require the U.S. Treasury to borrow money to raise cash needed to keep the Government operating. Treasury borrows the money by selling securities like Treasury bills, notes, bonds and savings bonds to the public. You can think of the total National Debt as accumulated federal deficits year after year.
So deficits are the problem?
Yep. If we didn’t spend more than we took in each year, we’d stop adding to the National Debt. Think of it like a credit card; unless that debt is paid off, the next year’s deficit is added to the existing debt and it continues to grow.
For fun, you can download the history of our annual deficits on a spreadsheet from the Office of Management and Budget (OMB) here. And here’s where you can view the current National Debt. And if you really want to freak out: http://www.usdebtclock.org/
Wow…that’s a lot of debt! When did we start running up the U.S. Credit Card bill?
Actually, the United States as organized under the U.S. Constitution in 1789 has almost always held a level of National Debt. In fact, the nation has been free of debt for only two years, 1834 and 1835. In its first year, 1790, the country faced a debt of $75 million. By 2013, the total outstanding National Debt had exceeded $16 trillion…which is a whole lot of millions.
How did everyone magically know the choreographed dance moves in that impromptu party that Lionel walks into?
Good you’re still reading. And it’s a good question, but we’ve moved on. Pro Tip: Play the song while reading the rest of this post and just enjoy it.
So deficits add up to our debt. Have we ever not had an annual federal deficit?
Prior to World War II, we still had debt, but the federal budget was in surplus about as often as it was in deficit. Some of the largest increases in the debt in our nation’s history resulted from wartime spending. There were also large increases in the debt held by the public related to the Civil War and World War I. Since World War II, the federal budget has been in deficit most of the time and the National Debt has steadily grown.
From FY1998 to FY2001, the federal government ran budget surpluses due to the pro-growth policies enacted by the Republican Controlled Congress. But since then, the budget has returned to deficit, and the National Debt had risen.
This increase has happened most dramatically under President Obama, who ran $1 trillion deficits for each of his first four years in office.
Well that wasn’t very helpful, was it?
Nope.
Ok, back to the Debt Ceiling…why was it established in the first place?
Prior to 1917, Congress approved each individual issuance of debt. In 1917, in order to facilitate planning in World War I, Congress passed a law that established a dollar amount ceiling for federal borrowing. This statutory debt limit allowed the federal government to borrow as much as it needed in order to meet the federal government’s obligations, up to a set dollar amount.
This amount has to be raised periodically over the years to allow for further borrowing to meet those obligations.
How many times has Congress had to do this?
A lot. Since 1940, the debt limit has been raised more than 90 times.
Here’s the recent history per the Congressional Research Service:
Congress…has modified the debt limit 10 times since 2001, due to persistent deficits and additions to federal trust funds. Congress raised the limit in June 2002, May 2003, November 2004, March 2006, and September 2007. The 2007-2008 fiscal crisis and subsequent economic slowdown led to sharply higher deficits in recent years, which led to a series of debt limit increases. The Housing and Economic Recovery Act of 2008 (H.R. 3221), signed into law (P.L. 110-289) on July 30, 2008, included a debt limit increase. The [TARP] Emergency Economic Stabilization Act of 2008 (H.R. 1424), signed into law on October 3 (P.L. 110-343), raised the debt limit again. The debt limit rose a third time in less than a year to $12,104 billion with the passage of the [Stimulus] American Recovery and Reinvestment Act of 2009 on February 13, 2009 (ARRA; H.R. 1), which was signed into law on February 17, 2009 (P.L. 111-5). Following that measure, the debt limit was subsequently increased by $290 billion to $12,394 billion (P.L. 111-123) in a stand-alone debt limit bill on December 28, 2009, and by $1.9 trillion to $14,294 billion on February 12, 2010 (P.L. 111-139), as part of a package that also contained the Statutory Pay-As-You-Go Act of 2010.
The current statutory limit is was set at $16,699 billion as part of a series of increases established under the procedures of the Budget Control Act followed by a short term extension as part of the No Budget No Pay Act.
When does the Debt Ceiling have to be raised next?
Federal financing being what it is, the point at which the federal government will hit the Debt Ceiling is never quite certain. However, on August 26, 2013, Treasury Secretary Lew notified Congress that the government would exhaust its ability to borrow in mid-October according to U.S. Treasury projections. So this will need to be addressed fairly soon.
And if Congress doesn’t raise the Debt Ceiling?
The United States will not have enough money to pay all of its bills. The government no longer has an ability to borrow to finance its obligations. As a result, the federal government would need to rely solely on incoming revenues to finance obligations. And since the federal government is running such a large deficit, the federal government’s bills exceed the incoming revenue every day.
The government will fail to meet its financial obligations, it will “default” and result in delays in federal payments and disruptions in government operations due to the shortage of cash…and that is bad for the economy and bad for you.
But should Congress just raise the Debt Ceiling, no questions asked?
Actually, for decades, the White House and Congress have used the debt limit to find bipartisan solutions on the deficit and debt. In fact, Presidents Reagan, Clinton, and Bush 41 all coupled Debt Limit increases with spending cuts & reforms.
But in a fiercely divided government, House Republicans have been focused on getting our spending under control (reducing those annual deficits that add to our debt) and have successfully pushed through reductions in spending over the past four years, totaling $165 billion in reductions since FY2010.
House Republicans also continue to advocate for a Balanced Budget. Balancing the Budget will help the government bring the National Debt under control.
No seriously…where are all the keytars?
I don’t know, man…I don’t know.