Friday, July 15, 2011

Debt Ceiling 101 - The Basics

If most accounts are accurate, the Federal government will reach the legal limit on its ability to borrow money (a borrowing limit of $14.3 trillion) on or about August 2, unless Congress raises the debt ceiling beforehand.  If Congress does not increase the limit, borrowed funds would not be available to pay bills and the United States may be forced to default on its debt obligations, an unprecedented situation. These helpful resources are offered for those, like yours truly, who are struggling to comprehend the enormity and complexity of the issue.

Back in February of this year, the Government Accountability Office (GAO) prepared this useful primer on government debt.  The report, entitled "Debt Limit: Delays Create Debt Management Challenges and Increase Uncertainty in the Treasury Market," was prepared "to assist Congress in identifying and addressing debt management challenges," in anticipation of reaching the debt limit sometime this year (at the time it was anticipated that the limit could be reached as early as April 5).

In noting that "failure to raise the debt limit in a timely manner could have serious negative consequences for the Treasury market and increase borrowing costs," the GAO provides this concise description of what the debt limit is and is not (emphasis added):
“The debt limit does not control or limit the ability of the federal government to run deficits or incur obligations. Rather, it is a limit on the ability to pay obligations already incurred. While debates surrounding the debt limit may raise awareness about the federal government's current debt trajectory and may also provide Congress with an opportunity to debate the fiscal policy decisions driving that trajectory, the ability to have an immediate effect on debt levels is limited.”

For a good overview of the debt limit and its various associated spending issues, you might wish to page through this concise and informative analysis on the matter (in a PowerPoint format) prepared earlier this month by the Bipartisan Policy Center.  The report was written Jay Powell, a Treasury Department official in the George H.W. Bush administration.

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