The federal government’s debt has never been more of a hot-button issue than it is now. After threatened government shutdowns and continued wrangling over the deficit, the current political fight hinges on the debt ceiling, a provision of a nearly century-old law that allows Congress to set the allowable limit of public debt the federal government can borrow.
It’s drawn national headlines for months now, and earlier this week the most alarming ones blared from the front pages when ratings agency Standard and Poors said it could lower the U.S. credit rating if Congress fails to raise the debt ceiling. That news sent the stock market plummeting to its worst day in a month.
1) What is it?
The debt ceiling is a Congress -approved cap on the amount of debt the federal government is permitted to borrow. The U.S. government typically spends more money than it takes in. According to the U.S. National Debt Clock the average debt per day since 2007 has increased over the past four years to $4.07 billion.
Debt increases when the government sells debt to the public (in the form of Treasury bonds) to “acquire the financial resources needed to meet its obligations,” according to a 2010 Congressional Research Service report on the history of the debt limit. Debt also increases when the government issues debt to “certain government accounts,” such as Social Security and Medicare trust funds.
2) Where did it come from?
The first debt limit was passed in 1917 on the eve the United States’ entry into World War I. In fact, according to the Congressional Research Service report, the measure helped finance the nation’s war effort.
The first limit capped the debt at a now paltry $11.5 billion. Originally, Congress had to approve specific loan and bond issues individually, but in creating the debt ceiling, it essentially turned the “management of federal debt over to the Treasury, while retaining control through a limit on total federal debt,” CBS Money explains.
In other words, CBS Money reports, Congress ceded more authority to the Treasury Department, but still kept the power of the purse strings to raise or lower the department’s allowance.
The federal debt has since been amended many times, reaching its current limit of $14.3 trillion.
3) How many times has it been raised?
The debt ceiling was raised repeatedly during World War II, once every year from 1941 to 1945. In the years immediately following the war, the ceiling was actually lowered.
However, according to the CRS report, since 1962, Congress voted through 74 separate measures to raise the debt ceiling.
Of those 74, 10 occurred in the past decade according to National Journal reports.
4) What’s likely to happen if it’s not raised?
The current debt limit is set to be reached by the middle of May. As of March 31, under the statutes governing the $14.3 trillion ceiling, the U.S. had borrowed $14.218 trillion.
Treasury Secretary Timothy Geithner, in a letter to Congress earlier this month urging it to raise the ceiling, said the department could engage in short-term fixes that would buy it at most eight weeks of time.
Geithner and economists from across the political spectrum say a failure to raise the debt ceiling would be catastrophic for the country’s financial outlook, including a likely default by the government.
“If Congress failed to increase the debt limit, a broad range of government payments would have to be stopped, limited or delayed, including military salaries and retirement benefits, Social Security and Medicare payments, interest on the debt, unemployment benefits and tax refunds,” Geithner wrote in his April 4 letter to Congress.
Just this week, the S&P, which evaluates the country’s credit quality, revised its outlook on the U.S. economy from “stable” to “negative, amid fears legislators would not raise the debt limit.
5) Why the political fight now?
The political fight centers on not so much whether Congress should extend the debt limit, but whether and how much such efforts should be tied to deficit-reduction measures as well.
As the Washington Post reports, federal spending and debt are under renewed public scrutiny.
Added to that is a new class of Republican legislators who rode into Washington on pledges to cut the government’s bloated spending and debt. “Many congressional Republicans, under the watchful eye of tea party activists, have been loath to do anything that even appears like it could lead to more spending,” The Post reports.