There are many stories in the news lately about the federal debt limit and many discussions about whether it should be raised and what the consequences of raising or not raising it would be. There also seems to be a great deal of confusion as to what exactly the debt limit is.
The federal debt limit is the total amount of money that the U.S. government is authorized to borrow to meet its existing obligations, such as Social Security and Medicare payments, salaries for our soldiers and other government workers, payments to contractors, and interest on the national debt. The federal debt limit is somewhat like the credit limit that an individual borrower has for spending with their credit card.
There are, however, two very big differences. First, if an individual gets an increase in their credit card limit, that will automatically allow that person to buy new things and put those purchases on the card. On the other hand, if the federal debt limit is raised, it does not allow the government to spend more, it simply allows the government to pay for things that were already in the federal budget. Buying new things or changing the budget would require new legislation by the U.S. Congress.
The second big difference between an individual and the government about raising the borrowing limit is who gets to make the decision. For the individual borrower, it’s the credit card issuer that provided the card that gets to decide if the individual can borrow more money. That decision will be based on the creditworthiness of the borrower. For the federal government, the debt ceiling was created by Congress in the early 1900’s and is a self-imposed limitation. If the government – Congress – wants to borrow more money, it can make that decision by itself by raising the debt limit. Congress has voted to raise the debt limit 78 times since 1960, in both Democratic and Republican administrations.
If Congress does not vote to raise the debt ceiling, the federal government will default on paying its bills. This means recipients of Social Security, Medicare, Medicaid, and government workers will not be paid, and the federal government will not honor most of its financial obligations. The U.S. has never failed to pay its bills on time, and because it does, it is the most reliable government in the world and can borrow money at the cheapest possible rates. If the U.S. were to default, those interest rates would increase significantly, and would cause major disruptions, impacting all of us. Maintaining good credit is as necessary for the federal government as it is for individuals. If the federal government should default on its financial obligations, it would be disastrous; the financial shock will be felt for a long time.