Debt Limit or Debt Ceiling, a Natural Need to Increase, Against Declining Budget Deficits: A Work in Evolving Evolution

U.S. is center stage now while people wonder if a default on debt will occur. Issue isn't driven as in Europe with doubts of country capacity to pay. In the U.S. capacity to pay is no question, rather U.S. concern of default arises from willingness to pay. Willingness probably is too simplistic, in that major fiscal policy issues between political parties create doubt on U.S. debt payments. Compromise between political parties define willingness to pay. Essential to addressing compromise is high spending versus inadequate revenue, funded by debt.

Debt ceiling issues arise from U.S. fiscal budgeting. In 2009 for example, U.S. government budget had a deficit between expenditures and tax revenue exceeding 10% of its GDP. Such imbalance requires U.S. to fill the difference by issuing debt, otherwise known generally as treasury securities, or treasury bills, notes and bonds.

When fiscal budget deficit to GDP ratio exceeds rate of GDP growth, imbalances of revenue against spending occur resulting in debt carrying over year on year and increasing. Such is the circumstance for the U.S. and essentially all developed economies. But in the U.S., a law exists which nearly all other developed economies don't have. This law is the statutory debt limit, or debt ceiling.

 

For most countries, ability of a government to borrow is an expected consequence of its penchant to spend. Accordingly, government borrowing is automatically linked to spending. In U.S., however, politicians can spend all day long exceeding revenues, but they hit that debt ceiling, despite spending commitments that exceed the debt ceiling. Once hitting this limit, gut checks and evaluation of expenditures happen. Even government, especially government, needs to step back from time to time, look at their spending, real revenue and their accumulated debt.

Denmark is, as far as can be seen, the only other country with a debt limit, limiting debt to fund budget deficits. Denmark places their debt ceiling so high, it doesn't become topical in government financing. In the U.S., it is obviously topical. Simply letting government spend, and borrow to do so, becomes a dangerous proposition in politics. Especially when no one wants to increase taxes or cut budgets. So, in the U.S., it appears the debt limit law is testing American appetite for government largess, or austerity.

U.S. debt ceiling issues in 2011 first questioned balance of government largess versus austerity. After brinksmanship, near disaster, and a credit downgrade by S&P, resolution came through the Budget Control Act of 2011. This measure set in place a piecemeal plan to address spending and debt. While it had some scaling by associating budget cuts with increasing the debt limit, scaling ultimately saw congressional inability to cut budgets. Without both parties reaching a budget cutting agreement, sequester became the automatic and default solution.

Sequester, or fiscal cliff, propositions were realized in January of this year. Many told of major economic declines for U.S. They could have been right. But, we have the American Taxpayer Relief Act of 2012 being passed January 2, 2013. This legislation considerably mitigated fiscal cliff cuts. It also increased the debt limit to $16.699 T. This is where we are today, along with Treasury engaging in its “extraordinary measures” to bridge the fiscal policy gap.

Where U.S. GDP hasn't increased at a higher rate than increasing government budget deficits, debt accumulation continues. There appears to be a $715B shortfall for FY2013 and a projected shortfall of $672B in 2014. All suggesting a new debt ceiling of $17.8T versus its current level.

Such an increase in the debt ceiling appears needed even with considerable reductions in the U.S. budget deficit. Where 2009 saw a budget deficit of more than 10% of GDP, Congressional Budget Office said in May, 2013 that budget deficit to GDP ratio for fiscal year 2013 ending September, 2013 was on track for 4% (providing the projected $672B deficit in 2014). Still, debt exists, but is less than could have been otherwise.  

Now, to pay for previous government approved appropriations, government must agree in some fashion to approve more debt. Also necessary is continued work to reduce the budget deficit, if only to reduce growth rate of U.S. debt to GDP ratio.... Or, U.S. can hugely increase its GDP. But increasing GDP is more elusive than setting a balanced budget.