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The Federal Debt Limit: Always a Battle


We’ve been hearing a great deal of chatter in Washington about the “debt limit.” What is it? Should we raise it? Should we just ignore it? What if we ignore it? The debt limit is the maximum amount the United States can borrow. That compares with the deficit or surplus, which are the difference between the amounts the federal government takes in with taxes in a year compared with the amount the government spends.

Think of it as the maximum limit on a credit card. If a person wants to increase the maximum limit, he or she must contact the credit card company. It’s the same way with the debt limit. Because the government consistently has spent more money than it has taken in through taxes, it has had to borrow money to keep the government functioning. Under law, Congress and the President establish a debt ceiling. If the government wants to borrow more money, it has to go to Congress and get permission. Congress has to pass a bill and the President must be willing to sign the legislation.

When Was The Debt Limit Established?
The debt limit began in 1917, when Congress passed the Second Liberty Bond Act of 1917. That law allowed the Treasury Department to issue Liberty Bonds, which were sold to the general public as a way to pay for World War I. In 1939, Congress passed legislation to create the first total debt limit. That year, the debt totaled $45 billion. The debt limit was raised every year during World War II, but was lowered when the war ended. Congress did not raise the debt limit during the Korean War because that conflict was financed through tax increases. In the late 1990s and early in this century, the federal government ran budget surpluses and the federal debt fell. However, it has grown each year since Fiscal 2001.

The current debt limit stands at $14.294 trillion, as compared with $4.370 trillion in the spring of 1993.

Why Is Raising the Debt Limit Controversial?
Members of Congress and Presidents do not like to raise the debt limit. It is a sign that the federal government has not lived within its means and has to borrow more money. And so, debates over raising the debt limit often result in much hand-wringing. In fact, for several years, the House of Representatives had a rule that said it had passed a debt limit increase simply by passing the annual budget. This allowed House members to say they had not voted to increase the debt. However, the House abolished that rule in 2011.

Sometimes, Congress has increased the debt by smaller amounts, forcing lawmakers to pass more than one increase in a year. In some years, Congress has attached legislation intended to wrestle federal spending under control. For instance, in 1985, Congress attached the so-called Balanced Budget and Deficit Control Act to the debt limit increase. The legislation, better known as the Gramm-Rudman-Hollings Act, set deficit targets and required automatic spending cuts if those targets are not met. Attaching such legislation to a debt limit increase provides Congress and the President with political cover, since at the same time they are increasing the debt; they are trying to rein in federal spending.

What Happens if Congress Refuses to Increase the Debt Limit?
If Congress refused to raise the debt limit, the U.S. would default on bonds that had been sold to people and other nations. Since this country has been viewed as a safe investment, many say that a default would throw the worldwide economy into chaos. That doesn’t mean that Congress increases the debt limit as soon as the President requests it.

Sometimes, Presidents request an increase in the debt limit and Congress refuses to pass the legislation for a while. Members of Congress debate the issue and the parties blame each other for the debt. As the federal debt starts to climb toward its limit, the Treasury Department starts to take maneuvers to keep the debt under the ceiling. For instance, in 2002, the Treasury Department kept the debt below the ceiling by delaying some reinvestments. Treasury also as several other tools to delay reaching the debt ceiling, but eventually it would be reached. Similar things occurred several times during the early part of this decade, but eventually, Congress always increased the debt ceiling.

In the latter part of this decade, the debt continued to increase, as Congress and the President attempted to stimulate the economy. In February 2010, President Obama signed legislation raising the debt limit to $14.294 trillion. At the time, many Senators expressed interest in establishing a commission tat would recommend ways to gain control of the debt. Those efforts failed. However, President Obama established the commission by executive order. The commission, which was called the National Commission on Fiscal Responsibility and Reform, issued a report in December recommending spending cuts and tax increases to lower the debt. Since 14 of the 18 commissioners did not endorse the recommendations, as required by the executive order, the report was not an “official” report of the commission.

What Is The Controversy Now?
Many new Republican members of the House were elected based on promises to slash the federal debt. Some of those members have said they will not vote to increase the debt ceiling. Even when there is general agreement that the ceiling should be raised, the House of Representative passes the measure on a close vote.

This year, there may not be sufficient votes in the House to pass the debt limit increase. Congressional leaders may have to attach deficit and debt control provisions that would cut spending in an effort to convince members to vote for the boost. That effort could prove to be even more contentious.

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