08.09.2013 0

Explaining the debt ceiling

dollarbombBy Rick Manning

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.

Now obviously neither the federal government revenue stream, nor the expenditure demands are constant on a daily basis, for instance it can be anticipated that more revenues will be received in April than June due to the April 15 income tax filing deadline.

However, on average, the U.S. Treasury has about $7.4 billion daily to pay America’s bills, and the bill basket has demands for $9.7 billion in payments.

If the debt ceiling is hit, the Treasury will have to make choices on what to spend that money on.

The average daily cost for interest payments on the $16.7 trillion that the U.S. government has already borrowed equal approximately $1 billion a day.  In an attempt to ensure that those who lent the money to America to pay for deficit spending get paid, the House of Representatives has passed legislation called by Representative Tom McClintock called the “Full Faith and Credit Act” instructing the Treasury Department to pay this bill first.  The Senate has refused to date to pass this priority setting legislation.

Even without this legislation, the Obama Administration can behave rationally, like any family facing a short term cash flow crisis, and choose which bills must be paid and which can sit in the basket a little longer.

Out of the $7.4 billion in average daily revenues, the government can make the $1 billion daily interest payments, and the approximate $1.5 billion daily cost to keep the Pentagon fully funded, leaving $4.9 billion to pay the remaining $7.2 billion in daily bills for things like Medicare, unemployment, Social Security and food stamps.

While hitting the debt ceiling does mean that bill payment priorities would have to be made by the Obama Administration, and that some bills will not be paid exactly on time, it is not catastrophic.

Eventually the debt ceiling will be extended and new borrowing can resume.

Hitting the debt ceiling also does not mean that all government borrowing stops.  As government bonds and notes mature, new debt can be issued to replace them.  In today’s low interest rate economy, this is good news for taxpayers as the government is currently replacing ten year debt that paid 4.45 percent interest with new debt that only pays 2.58 percent.  This interest rate savings lowers the cost of servicing that debt leaving the federal government even more money available to pay other bills.

So what is this D.C. crisis really about?

Raising the debt ceiling is one of the few truly must pass bills facing our government, and everyone knows it.  As such, special interests of all stripes line up their wish lists for inclusion in this bill.

Some are pushing for various types of “tax reform” which in D.C. terms means lower my taxes while raising someone else’s.

One group of Republicans responding to the impending implementation of Obamacare in 2014, and the public’s continuing opposition to the new law, view the debt ceiling legislation as the last chance to stop its disastrous consequences.  Their solution is to use Congress’ constitutional power of the purse to defund the law’s implementation.

The idea is simple.  If a majority of House members or at least 41 Senators refuse to extend the debt ceiling so long as Obamacare is funded, as the “crisis” extends they will force the Administration to accept a debt ceiling increase with this prohibition.  If they fund Obamacare, it will impact every American in just a few months with dramatically increased rates with predictably lower health care quality.  It is not over the top to say that people’s likely to die due to disruptions made to the system.

The debt ceiling fight is a game of chicken, and Obamacare funding is the prize.

In the next couple of months, the airwaves will be filled with screaming pundits worrying about the nation defaulting on its debts if we hit the debt ceiling.  Hopefully, this short, and deliberately simplified, explanation of what the debt ceiling is, what is at stake and an understanding that claims that our nation will default on our international debt, armed service members won’t be paid, and grandma won’t get her social security check are only true if President Obama chooses to create that pain by refusing to pay those bills.

So when you hear people predict that this will occur, you can rightly assume that those making the predictions are betting that Obama will choose to cause the maximum amount of pain to America in order to preserve funding for his health care law.  Based upon history, and his bet that he won’t be held accountable for the priorities he sets, they might not be far from wrong.

Rick Manning (@rmanning957) is the Vice President of Public Policy and Communications for Americans for Limited Government.  He was an NRA lobbyist responsible for the state of Florida in 1987. 

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