After the ‘fiscal cliff’ deadline passed, the buzz about the nation's debt ceiling heightened. A power point presentation by Bipartisan Policy explores some of the effects that hitting the debt ceiling could have. An article in Daily Finance explains how this may affect your wallet. Here are 10 things every American should know about the debt ceiling, the possibilities of overcoming it and the consequences if it’s not dealt with.
On Dec. 31, 2012, the U.S. hit its debt limit. Congress, which controls national spending, sets the limit and can approve more borrowing if needed. That’s why the nation’s credit limit has simply been increased in the past.
Congress is currently debating if it should increase the debt ceiling or start defaulting on obligations to try and halt the debt growth. If the limit isn't increased, money to operate the government will have to come from somewhere else, whether it’s by cutting military and civilian employee salaries, programs or raising taxes.
When the debt limit was reached a few weeks ago, the Secretary of the Treasury used emergency borrowing authority to spend about $200 billion to fund government operations.
This is referred to as “extraordinary measures,” which allows the Treasury Department to use legal financial maneuvers to take care of government obligations.
The Treasury Department will have two sources of funds, which are the remaining cash from any leftover funds from the emergency and the daily cash inflow from federal revenues received each day, such as payroll withholding funds from employers.
There are four options the Treasury Department can use to meet obligations. The first is to issue new debt, which requires approval by the Congress; the second is using the previously mentioned extraordinary measures, which is currently occurring; the third is using daily revenue and the cash on hand until it runs out; and the fourth is imposing what is called the "X Date" which would allow obligations to go into default.
When the United States has no other means to pay financial obligations, it has reached the “X date.” This means the government will default on its financial obligations.
The Bipartisan policy center estimates this date will likely occur somethime between Feb. 15 and March 1, 2013.
The Treasury Department may attempt to prioritize which payments need to be made on time and which are less important. Unfortunately, it’s not certain whether this is feasible due to the design of the Treasury Department’s computer system.
Under this option, 40 percent of obligations would go unpaid. There are more than 100 million monthly payments it would be choosing from. Essentially it would be up to the Treasury Department to pick “winners and losers.”
One other option is to accumulate cash until there is enough to make a single payment for all of the payments due on that particular day. For example, it could take two days of accumulating revenues to make all the payments due on that particular day.
It would be impossible to meet daily needs for important government programs like social security, Medicare, Medicaid, Defense, and military active duty pay, so government checks wouldn’t be issued.
Currently, daily revenue from taxes covers 60 percent of what the government spends and borrowed money takes care of the rest. Once the government is no longer able to borrow, it would have to get the money by raising taxes, cutting services, reducing it’s payroll or a combination of all three.