The debt ceiling and the deficit: What you need to know

The August 2 deadline for deciding whether to increase the federal debt ceiling is approaching, and members of congress are digging in their heels.

Democrats warn that increasing the limit to the amount of debt our country can carry is essential in order to keep our economy from collapsing. Republicans insist that they won't agree to raise the debt limit unless Democrats agree to make huge spending cuts and not increase taxes. If we don't increase the debt ceiling soon, we might be in default, which would ruin the country's credit rating, economists caution. "We are obviously running out of time," President Barack Obama said in a press conference earlier today.

But tax increases and budget cuts actually have no bearing on the debt limit. Neither does the size of government, Social Security, Medicaid, Medicare, balancing the budget, lowering taxes, increasing income, or reducing the deficit. It seems odd, given that all of those things have to do with money and government spending, but the federal debt limit is about how much revenue the government can raise, not about how it budgets the money.

"The debt ceiling is a cap on the amount of securities the Treasury can issue, something it does to raise money to pay for government expenses," Bruce Bartlett, a domestic policy adviser to Ronald Reagan and a Treasury official under George H. W. Bush, explained in the Washington Post. "These expenses, and the deficit they've wrought, are a result of past actions by Congress to create entitlement programs, make appropriations and cut taxes. In that sense, raising the debt limit is about paying for past expenses, not controlling future ones. For Congress to refuse to let Treasury raise the cash to pay the bills that Congress itself has run up simply makes no sense."

So what's at stake right now? Here are some common questions about the debt ceiling, and how we got to this point.

How is the deficit related to the debt ceiling?

The deficit is the difference between the amount of money the United States takes in (taxes and other revenue) and what it pays out, according to the Treasury Department. The debt ceiling is the cap on the amount of money the government is allowed to borrow from its people (in the form of Treasury bills, bonds, and other initiatives) and from other sources.

When did we last raise the debt ceiling? How much do we owe now?

The federal debt ceiling was last raised in February; the government now has about $14.3 trillion in debts.

How many times has the debt ceiling been raised?

The limit has been raised 74 times since March 1962, according to the Congressional Research Service.

What happens if it doesn't get raised now?

The president would have to break the law by defaulting on the debt, or he would break the law by not paying the bills he's legally required to pay.

Why do we even have a debt ceiling if Congress can just raise the limit as needed?

The U.S. is actually the only country in the world that puts a cap on the amount of debt it can hold. Before World War I, Congress had to individually authorize every Treasury bond issue; in 1917 they passed the Second Liberty Bond Act, which set an overall debt limit instead and gave the Treasury more flexibility.

How did we rack up so much debt to begin with?

Party politics aside, we accrued most of the debt from war-related spending and major tax cuts. A severe recession, TARP, and an ineffective economic stimulus just made matters worse, according to the Center on Budget and Policy Priorities.

Can't the government only pay the most important bills and borrow less money each month?

The U.S. Government actually hit its debt limit back in May, when Treasury Secretary Tim Geithner told Congress that he would have to stop paying into federal retirement funds in order for the U.S. to be able to borrow enough money to pay its other bills.

That's like you or me skipping a few credit card payments in order to stay on top of the mortgage. In that situation, most money-management experts would advise you to cut spending (no more cable, no more lattes), use your income to pay your most important creditors first, then divvy up your remaining revenue among your other bills. But that advice doesn't translate when you're talking about government spending.

According to analysts at CNN, the Treasury Department takes in an average of $177 billion a month. Interest on the public debt is about $19 billion a month. But the government's monthly expenses average about $276 billion. The government borrows the approximately $118 billion difference each month.

The money available for spending is appropriated during the budget process, not while debating the debt ceiling, and paying for certain programs-like Medicare, Social Security, and Medicaid-is mandatory. Cuts in discretionary spending would have to be very, very steep in order to create enough money to bridge the $118-billion-a-month gap. (How steep? Eliminating all defense spending and highway construction would come close. But that's crazy.)

If you default on a loan, your credit rating takes a hit. If the U.S. defaults-or, some experts say, even appears to be about to default-the consequences are far greater.

"The bond-rating agencies have repeatedly warned that any failure to pay interest or principal on a Treasury security exactly when due could cause the U.S. credit rating to be downgraded, which would push interest rates up as investors demand higher rates to compensate for the increased risk," writes Bartlett in the Washington Post.

What's all the talk about the 14th Amendment? Isn't that the one about due process?

Section four of the 14th Amendment states: "The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned."

Some interpret this to mean that it would be unconstitutional to prevent the Treasury from issuing debt as needed. Others say it means that the government is not allowed to default on its debts.

Is the current stalemate an example of conservatives vs. liberals?

Not really. It's more a matter of politicians working against whoever is in the Oval Office at the time. Most of the Republicans who agreed to raise the debt ceiling in the past are very opposed to doing so now-and most of the Democrats who want to increase our debt limit now took strong stands against doing so when President George W. Bush was in office.

For example: Republican Senator Orrin Hatch of Utah has consistently voted against raising the debt ceiling during the Obama administration, a CNN analysis shows, but during President Bush's eight years in office, Hatch voted to raise it six out of seven times. From June 2002 to September 2007, House Speaker John Boehner voted to increase the debt limit $5.95 trillion to $9.815 trillion-without demanding that the government cut spending or find other sources of revenue. And back in March 2006, one democratic senator criticized President Bush harshly, saying on the Senate floor, "The fact that we are here today to debate raising America's debt limit is a sign of leadership failure" and "Increasing America's debt weakens us domestically and internationally." That senator is the president now-and, apparently, his point of view on the debt ceiling has changed dramatically.




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