The Next “Crisis”: The Debt Ceiling

0 Posted by - January 17, 2013 - Career & Business, Economics, Money

 The Next “Crisis”: The Debt CeilingSometime in the next 30 to 60 days the federal government will reach the legal limit on its ability to borrow, setting up the next potential budget crisis in Washington. The debt is currently $16.4 trillion, technically in excess of the statutory limit, and the Treasury Department has been using “extraordinary measures,” such as delaying payments to federal retirement programs, in order to push back the final day of reckoning.

But Treasury’s ability to push off the deadline is almost spent, and unless Congress authorizes an increase in the debt limit, we will face yet another financial cliff. With Republicans in Congress calling for spending reductions as the price for increasing the debt limit, and President Obama insisting that he will not negotiate on the issue, we may soon be looking back on the fiscal-cliff deal as a model of relative comity.

Unfortunately, much of what we are being told about the debt limit and the upcoming fight is simply untrue. For example, President Obama warns that failing to increase the debt ceiling would “force the government to default on its obligations.” Not so.

There are two parts to the obligations subject to the debt ceiling: that part of the principal maturing during the time in question and the interest payments that the federal government must make on its debt. Between February 15 and March 15 of this year, the federal government will owe roughly $38.1 billion in interest payments. Failure to make those payments would indeed result in default. However, the federal government will also collect an estimated $277 billion in taxes and other revenue over that same period, meaning there will be more than enough money available to make those interest payments.

CONTINUED at the Cato Institute. Written by Michael D. Tanner.

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