The debt ceiling debate is re-emerging in Washington, D.C. as the nation heads toward another showdown over deficit spending. So just what is the debate all about, and what are some of the common misconceptions about what happens if the nation hits the debt ceiling?
The nation’s $16.699 trillion debt ceiling is nothing more than the current limit that is put into law limiting the amount of borrowing that can be done by the U.S. Treasury. In times of deficit spending, the federal government sells bonds or notes to investors with the promise to pay interest in exchange for those investors lending the money to the government to cover the deficits.
The most famous of these Treasury bonds are savings bonds, which grandparents have been giving grandchildren for generations. However, most people have also heard of what is known as the ten year Treasury note. Many common items like many adjustable mortgage loan rates are tied to the rate the government pays to borrow money for a ten year term.
The debt ceiling itself is a creation by Congress and the President that prevents the U.S. Treasury from borrowing more than a specific amount of money, without getting additional approval from elected officials. This “debt limit” is designed to force a national debate on federal government deficit policies, and have Congress and the President take stock of our spending and taxation policies that have led to the need to enable further borrowing.
When the debt ceiling is reached, the effect is that the U.S. Treasury cannot add any additional debt burden to the nation until Congress passes and the President signs legislation raising the limit.
Contrary to what many believe, even in the media, this does not mean that the government shuts down, it only means the government cannot spend more money than it collects in revenues until the debt ceiling is increased.
With federal government revenues projected to top $2.7 trillion this year, the government receives, approximately, $7.4 billion each and every day, and it will spend approximately $3.5 trillion over the year or about $9.7 billion each day.
This approximate $2.3 billion dollar daily deficit is what is paid for through the issuance of new debt that is prohibited once the debt ceiling is reached.
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Rick Manning (@rmanning957) is the Vice President of Public Policy and Communications for Americans for Limited Government.