(WETM) – Once again, Americans are watching as lawmakers in Washington get ever closer to hitting the national debt ceiling. It’s a regular conversation, and last week, the Treasury Secretary told Congress the U.S. would hit the limit by Thursday, January 19, 2023.
There seems to be so much importance laid on the need to avoid hitting the ceiling, but at the same time, it’s a complex mechanism that leaves many Americans confused.
Since the new year, Google Trends reports that interest in the U.S. debt ceiling has spiked since this time in 2022. This week, searches have been estimated to reach their highest point since Jan. 2022.
The ceiling currently sits at $31.4 trillion. If the U.S. reaches it on Jan. 19, then the Treasury Department will take “extraordinary measures” to avoid defaulting on our loans. Then once those measure dry up—which would likely be mid-summer—federal lawmakers must vote to raise the limit to avoid defaulting.
So what is the debt ceiling, why does it matter, and how does it even work?
What is the debt ceiling and how does it work?
One common misconception about the debt ceiling is that it allows the government to spend more money. It does not.
Instead, raising the debt limit allows the federal government to borrow money to pay back debts it has already accumulated (to make good on past—not future—obligations). In other words, it’s a cap on how much the government can borrow, not how much the government can spend.
In order to avoid a government shutdown and a default on its loans, the government must raise the debt ceiling in order to borrow money that will be used to pay back all that debt.
In a Wall Street Journal op-ed, Treasury Secretary Janet Yellen compared raising the debt ceiling to raising the country’s credit card balance. It does not increase the federal budget.
However, when talks of the debt ceiling inevitably arise, politicians very often use it for political leverage, saying that the ones who want to raise it only want to spend more money.
Are debt and deficit the same?
While they may sound similar, the national debt is not the same as the national deficit.
The debt is how much money the U.S. is borrowing to make good on past spending.
The deficit is the difference between what the U.S. government raises with taxes and what it spends (on things like Social Security, Medicare/Medicaid, and military salaries, for example).
The two are related, though. If the government spends more than it makes, the deficit will increase. As a result, the deficit will contribute to the overall national debt.
Why is the government able to borrow more money in order to pay bills that already exist?
On an individual level, a person or a family can’t just borrow more and more money each year to pay their bills that already exist. In other words, you can’t keep paying a credit card bill with another credit card.
However, on a national and global scale, “that’s how the government operates,” said Martin Cantor, a Long Island Consulting Economist in 2021. “The days of cash in equals cash out are long gone.”
“Every country operates on debt because in order to have capital expenditures, for infrastructure, you’ve got to borrow the money,” he explained. “There’s no way we can raise a trillion dollars for infrastructure through raising taxes. It’s debt.”
What if we hit the debt ceiling and the government defaults?
If the ceiling doesn’t get raised, and the government hits the magic number, then it will be unable to pay back its loans. With a country as big as the U.S., defaulting on our loans would cause worldwide economic disruption.
In the fall of 2021 when Congress was again just days away from hitting the ceiling, Cantor said it’s extremely unlikely the U.S. would default because the risk is so high.
Basically, the U.S.’ credit score would plummet and it would become much harder to borrow money. However, the U.S. has never defaulted on its loans in the 100 years the debt ceiling has existed. Normally, both parties want to avoid a default.
What if we just got rid of the debt ceiling?
Some argue that the U.S. should simply axe the debt ceiling.
Eliminating the debt ceiling would also eliminate the risk of the government running out of money. That means there would be no risk of the U.S. defaulting on its loans, which, in turn, means there would be no risk of a government shutdown.
That step would allow the spending and taxes approved by Congress and the president to determine how much debt the government issues, instead of a legally binding but otherwise superfluous cap.
The Associated Press contributed to this report.