What is the Federal Debt Ceiling?

The Democrats and the Republicans are arguing again about raising the Federal debt ceiling. It happens every year, and the constant threat is that the Federal Government will "close" if the ceiling is not raised. In thirty years of leading accounting departments in all sizes of business and in both for profit and not for profit organizations, I have seen this little bit of Congressional theater go on nearly every year.

Just what is the Federal debt ceiling and why is it such a big deal?

The Federal government does not borrow the way you or I do. When we borrow, lenders look at our credit score, our payment history, our debt load and decide if they will lend to us. The government, however, is assumed to have perfect credit. The only decision that lenders make is the interest rate that they want in order to lend.

The government borrows for the same two reasons that I might. I may need to balance cash flow by using a line of credit between paychecks. Or, I may need to spend more than I bring in as income so I take out a loan of some kind. The Federal governments borrows for both of those reasons.

By law, the amount of money that the Federal government can have borrowed is limited. That is the debt ceiling. When the government needs to borrow in excess of that amount, Congress must approve an increase in the ceiling. There are amounts that the government borrows that are not subject to the debt ceiling but nearly all of the debt incurred is.

The Treasury Department posts the national debt daily. For example, on January 5, 2011, it was $14,011,526,727,895.85. That's fourteen trillion dollars. $13,945,280,000,000 of borrowings or so are subject to the debt ceiling.

The ceiling is $14,294,000,000,000 and was last raised in February 2010. Interest on all that Federal government debt came to $413,954,825,362.17 in the 2010 fiscal year.

$413 billion in interest payments on the national debt is a lot of money. Only 19 nations have a Gross Domestic Product higher than that number. The U.S. spends more on debt interest payments than all but 19 of 181 countries spend on their entire economies.

You can see why Congress has an interest in the national debt and the debt ceiling. For all their posturing, our elected representatives do understand the importance of the Federal government being able to borrow. The new 112^th Congress has some other priorities and they fall in line with what you and I might do if we were overextended in our borrowing.

A great many members of Congress want the Federal Government to cut back on spending. Reducing the deficit reduces the amounts borrowed. Reducing borrowing reduces interest payments. Reducing interest payments reduces spending. And so on...

The debt ceiling always gets raised. The only thing that varies is the amount of rhetoric from Congressmen and action taken by Congress before the ceiling is raised. Between now and March, we will see if our elected Congress can make any spending cuts or find ways to reduce the need for the government to borrow. It is what any businessman, or you and I would do.

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