Deficit and the debt ceiling



A country can have a deficit in a given year, if it spends more than its income, say from taxes and other sources. The difference will be a debt it owes.

The debt of a country is the accumulation over many years. Say the country spends $10, but has only $6 in income, to keep it simple. At the end of the year the $4 will be added to the debt it has accumulated over past years.

Above is a diagram from the Khan Academy showing the example of deficit vs. debt. It is pretty close to the deficit of the USA, where the deficit has been around 40% for a number of years. The amount gets added to the debt as shown in the graph. 

Congress sets a debt ceiling, which gets adjusted several times a year. It is a political game in which the minority party threatens not to raise the ceiling, unless there is also a debt reduction put in place. Jack Lew, the current US Treasury Secretary can manipulate some funds around to cover part of the debt, but at a certain point will have to tell Congress the treasury will run out of money by, say July 14. Then Congress goes to work and debate the next debt ceiling level.

One thing I never knew is that Denmark is the only democratic nation other than the United States that has a debt ceiling and borrowing system separate from its spending policies. What does that mean?

By this process, spending bills like budgets are passed and then a separate battle is fought over whether the debt ceiling should be raised to accommodate borrowing to allow such spending. There is nothing to require a correlation between the two. However, in nations like Canada, Sweden, the United Kingdom, and New Zealand, spending is directly tied to the national debt limit. The government in Canada is allowed to borrow only as much money as is approved to be spent in the yearly budget. In the UK and New Zealand, the Treasury departments can borrow only as much as is approved by parliament. These countries tie their debt limits to their spending numbers.   (Radio Free Europe article, August 26, 2014)

Where else is a borrowing system separated from spending? That is not something I learned in kindergarten.

If the debt ceiling is not raised, the government goes into default. It will have to reduce expenses in programs such as social security, Medicare, Defense, etc. The result is that the government is no longer trusted. It is risky and as a result the interest rate will increase, which makes the default situation only worse.