For 55 of the last 59 years, the federal government has spent more money than the revenue it has raised. The resulting annual deficit was financed by selling long-term bonds, usually with 10 or 20 year maturities. Since there is no plan in place to ever pay this money back, the annual deficits are added to the public debt.
While the government pays interest to the bond holders annually, it does not have the funds to repay the bonds when they mature. So what does the government do?
It simply sells new bonds and uses those proceeds to repay the mature bonds. As a result, the public debt, which is the total of all annual deficits financed by the bonds, just keeps getting larger. Today’s $28.5 trillion in public debt is due to shortly top $30 trillion.
Enter the Debt Ceiling
In order to ensure that the federal government does not go so far in debt that the annual interest payment becomes overly burdensome, in 1917, the debt ceiling was established, at $11.5 billion. The ceiling has been raised nearly 100 times since.
In 1945, the debt ceiling was raised to $45 billion. In the 1980s, the ceiling was first raised to $1 trillion and continued to increase. Today, the debt ceiling is about $28.5 trillion, meaning the limit has been reached. Congress and the Treasury can shift some funds around, but the limit will be reached sometime in October.
That means that Congress must act to raise the borrowing limit or the federal government cannot spend more money than it receives in tax revenue. If an increase is not enacted, the federal government will shut down all non-essential services and may not have enough funds to pay the interest on the existing debt.
If that happens, a default is declared, which will have very negative long-term effects on government spending and borrowing. Everyone wants to avoid a default.
In order to avoid a default by raising the debt ceiling, Congress will have to legislate a debt ceiling increase. That means a simple majority in the U.S. House of Representatives is needed, but in the Senate, a super majority of 60 senators is necessary.
The Democrats have a majority in the House but only 50 votes in the Senate, meaning at least 10 GOP (Grand Old Party) Senators will have to vote in favor of the increase. As a result, compromise is necessary.
The GOP recognizes that the public debt is already too high. With the vast increases in spending that the current administration is proposing, the public debt will grow very quickly in future years. The Dems support this, but the GOP does not.
Is the Debt Too Big to Handle?
Analysts usually say that if the public debt does not exceed one year’s net revenue to the government, it’s probably manageable. Above that, it is burdensome. If we measure annual income of the country by looking at gross domestic product (GDP), the current debt is already about 1.4 times higher than the $21.5 trillion GDP.
Another view is that the public debt is the federal government’s debt. The federal government’s income is about $4 trillion, meaning the public debt is more than seven times higher than the federal government’s income.
That’s like someone with a $100,000 income trying to carry a $700,000 mortgage,
This year, the interest on the public debt will be about $400 billion, which represents 10% of all government non-COVID related expenses. Even with no more debt added, as the current debt is rolled over with future interest rates two or three times higher than the government is currently paying—the annual interest expense will approach $1 trillion. That will be too burdensome.
For fiscal 2020, the annual deficit will be more than $3 trillion. If the Dems pass the infrastructure bill and the American jobs bill, the United States’ annual deficit will exceed $1 trillion dollars for the next 10 years. That will raise the public debt to more than $40 trillion and perhaps bankrupt the country.
We should do what we can to reduce the annual deficit, to approach a balanced budget. The current climate in Congress and the position of the Biden Administration makes that nearly impossible.
Solving this dilemma will be very difficult. It will be interesting to see how Congress resolves this.
Simple logic tells us, we can’t continue to spend money that we simply do not have. Let’s hold the line on the debt ceiling.