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Explaining the National Debt Ceiling
The national debt ceiling is the maximum amount the government chooses to borrow at any given time. The US government has increased the debt ceiling 91 times since 1960 to match the budget deficit. The ceiling stands at $14.3 trillion as of July 2011.
Failure to raise the debt ceiling when the total borrowing reaches the debt ceiling means a cap on further borrowing, and thereby, the inability to make payments for expenditures incurred, repay existing loans, or honor commitments. Raising the debt ceiling to a higher figure, balancing the budget by reducing expenditures, and/or increasing revenues may avert a default.
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Balancing the Budget
The government incurs two types of expenditures:
- Obligatory or fixed commitments such as loan repayments, salaries, and other liabilities.
- Discretionary expenditures such as spending on infrastructure, stimulus packages, and many other types of spending as outlined in the budget.
Not repaying an obligatory commitment, like a matured bond, constitutes default. As such, the government makes spending cuts by making fewer allocations for discretionary items, such as infrastructure, in the budget. Discretionary items are those that the government is not under any liability or obligation to pay and can choose to spend only if it wants to do so.
Closing tax loopholes, raising new taxes, widening the tax net to include more people, and stimulating economic growth all increase tax revenues. Balancing the budget usually requires a combination of all these activities.
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The opponents to balancing the budget opine that reducing government spending and/or levying higher taxes result in less cash in the market. The cash crunch forces businesses to cut jobs. This increases unemployment, thereby increasing spending on social security and welfare programs, which makes the purpose self-defeating. Increased unemployment reduces the demand for goods and services, which in turn fuels further job losses and creates a vicious cycle leading to recession or depression.
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The proponents of balancing the budget argue that living within means is the fundamental basics of sound financial management, and federal expenditure should not exceed revenues.
The debt ceiling, although a self-imposed limit, also represents the ultimate borrowing power. The government may fix any amount it deems fit, but the availability of such an amount as debt depends on whether the lenders consider the government capable of repayment.
Raising the debt ceiling would work only as a short-term measure. The added liabilities of the new loans would add to the budget deficit, and soon a stage would come when the lenders refuse to lend any more money because of doubt about the government’s ability to repay. This would lead to permanent defaults and an economic catastrophe.
The following are some of the suggestions made by advocates of balancing the budget.
- Link social security cost of living indexes to the chained consumer price index (CCPI). The CCPI works by compensating for the price increase of a product by using less of it, finding a cheaper substitute, using something different, or avoiding it as appropriate. The Bureau of Labor Statistics first published the CCPI in 2002. Linking social security to CCPI would reduce social security outgo by an estimated 10 percent through 2020.
- Institute tax reforms to ensure that the wealthy pay more on a progressive basis. One suggestion is to revise the Alternate Minimum Tax to make it serve its original purpose of countering the effect of people taking advantage of tax shelters to pay zero taxes. Another suggestion is to cut tax breaks such as mortgage reductions that benefit high-income taxpayers
- Rollback some of the recession-induced welfare programs. Repeal of the CLASS Act that created a program of voluntary long-term-care insurance would, for instance, reduce the federal deficit by $70 billion over 10 years
- Re-evaluate federal spending priorities. Federal tax revenues total an estimated $2 trillion in 2011. Setting aside $0.5 trillion to service existing debt, the government still has about $1.5 trillion to fund constitutional functions. To put things in perspective, the entire federal budget was only about $1 trillion in 1990, and the crux of the debt crisis is this figure quadrupling in the last 20 years.
- Stimulate economic growth by means such as a pro-enterprise legislative climate, which would increase tax revenues
All these proposals have pros and cons, and their effectiveness in the overall scheme of things requires working out.
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The present debate on whether to raise the raise the debt ceiling as the US government heads for a default by August 2, 2011 brings the issue to center-stage. The debt ceiling at present stands at $14.3 trillion, and the government requires $2.2 trillion more, through 2012.
Raising the debt ceiling is only a short-term measure. Balancing the budget through a careful evaluation of federal spending to make the necessary changes and tax reforms will make a permanent fix.
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- Paul, Ron. “Stop Raising the Debt Ceiling.” http://www.thedailybell.com/2381/Ron-Paul-Stop-Raising-the-Debt-Ceiling.html%20
- Michael Hiltzik. “Fight over raising the debt ceiling almost sure to lead to bad policy.” Los Angeles Times. http://www.latimes.com/business/la-fi-hiltzik-20110724,0,1491026.column
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