Last week, the federal deficit exceeded $14 trillion, according to the US Treasury’s most recent statement [.pdf]. This total includes public debt, which is currently $9.4 trillion, as well as intragovernmental holdings, which are $4.6 trillion. Public debt refers to when the government sells bonds or other forms of debt to the public, whereas intragovernmental holdings refer to government disbursements to programs such as Medicare.
Current law prohibits the federal deficit from being more than $14.3 trillion, as specified in the Statutory Pay-As-You-Go Act of 2010 [.pdf]. As a result of this limit and the present deficit amount, the federal government is only $300 billion away from the debt ceiling. In December alone, the federal deficit totaled $80 billion. At this rate, the federal government would run out of money in late March.
Treasury Secretary Timothy Geithner issued a letter [.pdf] to Congress confirming an impending collision with the debt ceiling in March. Geithner, as well as Chief Economic Adviser Austan Goolsbee, say there would be many consequences for the US economy if the debt ceiling is not raised, including:
- A significant tax for all Americans. Interest rates would drastically rise for state and local government, as well as corporate and consumer borrowing, such as mortgage rates. This would cause a decline in home values and retirement savings, which would lead to reductions in spending and investments and cause widespread business failures.
- Negative impact on the dollar’s dominant role in the international system. This would cause interest rates to spike further and also suppress international investments in the US economy.
- Government payments to a number of programs could be discontinued or severely limited to almost every program, including but not limited to US military salaries and benefits, Social Security and Medicare benefits, federal civil service salaries and benefits, veterans’ benefits, student loan payments, maintenance of government facilities, and tax refunds.
Basically, the federal government would shut down if the debt ceiling is not raised. Whenever the deficit amount has approached the debt ceiling in the past, Congress has simply passed a bill to increase the ceiling amount. Since mid 2008, the debt ceiling has been raised four times. The first three increases came in a 8-month span from July 30th, 2008, to February 13, 2009. Though, these three increases were much smaller increments than the most recent increase in 2010.
The average increase for the debt ceiling in 2008 and 2009 was $763 billion. Contrarily, the 2010 increase was $2.1 trillion. While these facts show how the debt ceiling took a noticeable jump in 2010, they also show how the debt ceiling was raised three times within 8 months when smaller increments were enacted. Arguably, smaller increments were utilized in the past because the extent of the recession was not yet clear. Regardless of how you look at the federal deficit, it is an urgent issue. Interest alone accounted for $414 billion of spending in 2010. Also, each American citizen represents about $45,000 in the national debt.
With a mountain of federal debt, many lawmakers have voiced a reluctance to approve another raise of the debt ceiling in 2011. Republicans have particularly voiced this concern, such as Michele Bachmann, Eric Cantor, and Lindsey Graham. Though, these lawmakers have not said they absolutely refuse to raise the debt ceiling, but instead have said they would not do so without an inclusion of “serious” spending cuts. A reduction in federal spending is a popular idea in Washington, but exactly where to reduce spending has little consensus.
Throughout fiscal year 2010 [.pdf], Medicare and Medicaid, Social Security and Defense programs accounted for 64% of federal spending. With the exclusion of these programs, a relatively small portion of the federal budget remains open to a reduction in spending. This explains why the exact methodology on how to reduce federal spending has little consensus, even among members of the same party.
In the worst case scenario, if the government does not increase the federal debt ceiling before the deficit reaches $14.3 trillion, the government would not immediately shut down, but would first rely on IOUs. This is exactly what occurred in 1996 and 2002, when Congress similarly hesitated to increase the debt ceiling. Even though Secretary Geithner has said he would use this same strategy, he also said this strategy would only buy “several weeks.” Facing the grave consequences of hitting the debt ceiling, the remaining question is whether Congress will increase the ceiling before the government resorts to IOUs.