As the presidential election has come and gone, there was constant buzz about the topic of the Fiscal Cliff, the U.S. government’s plan to make changes to our nation’s budget in an attempt to keep this country out of a recession. Now there is a new topic being discussed: The Debt Ceiling. So what exactly is the debt ceiling? Let’s start with the basics.
To understand the debt ceiling (also known as the debt limit), one must know that the United States splits financial responsibility between the President and Congress. The President has two jobs when it comes to finances: 1) to collect taxes and 2) spend those taxes to run the government. Though it may seem like the President has complete power, in actuality, the President takes orders from Congress. Congress’ job is to set the tax level and determine how much the government will spend by making a budget. As a result, whatever Congress decides to spend money on is what our taxes are used for.
The Problem: Congress puts more money into the budget than what is collected through taxes, which forces the President to borrow money in order to cover the difference. Because our nation has been in debt for such a long period of time, Congress also has the power to limit how much total debt the United States can have. It’s important to note that the debt ceiling is not a limit on future spending, but about paying bills that have already been incurred. For example, the Government asks a company to repave a highway. However, if the debt ceiling is reached after the work is already done, they do not have the money to pay that company. This shakes trust in the United States, which in turn affects the entire world because large parts of the global economy rely on the American Dollar being stable.
Though it is unclear what the best solution to this financial mess is it seems that Congress will, once again, raise the debt ceiling to avoid panic, something they’ve done dozens of time in the past.