A Lesson in Politics: Debt Ceiling, Deficit, and Government Shutdowns
Today’s Lesson in Politics covers three important topics: the debt ceiling, deficit, and government shutdowns. These three phrases are often thrown around in similar conversations, but each means something different about the workings of the government. Each has a role and a purpose, but are distinct from one another — and you can learn how below.
Debt Ceiling
The debt ceiling, put simply, is the limit or “ceiling” on the amount of money the United States can borrow. This concept was established in 1917 through the Second Liberty Bond Act. Prior to this act, the President of the United States had free reign over the finances and Congress wanted a means to keep the president accountable, especially as the United States got involved in World War I.
Why does the debt ceiling exist? While the original goal of the debt ceiling was to force the president to be fiscally responsible, the modern debt ceiling allows the United States government to pay all its bills. Typically, the United States spends more money than it takes in.
What happens when we get close to the ceiling? Congress can raise the debt ceiling whenever the United States gets close to hitting the limit, and they have done so in the past. It’s important to note that Congress has already authorized spending of these funds. The debt ceiling limits how much money the United States can spend and it cannot spend more than the limit. However, most of the funds have already been authorized through legislation and cannot be paid for if the limit is hit.
What happens if Congress does not raise the debt ceiling? The United States would be in default. We’d miss an interest payment to our bondholders and the country’s credit would decrease. This would be catastrophic, as this money is needed to pay the United State’s bills… and it could send the global marketing into a spiral… none of which is good. (Think a financial crisis on par with 2008.)
Why is it significant now? On September 7th, Democratic leadership made a deal with DJT that would ultimately eliminate the need for Congress to raise the debt ceiling as often as it does (the deal also funds the government through December, preventing a possible shutdown). Republicans weren’t in the room, and they disagree with this deal. This issue was politicized long ago — conservatives typically view the debt ceiling as a way to curb federal spending, liberals favor raising the ceiling so the United States can continue operating.
Who do we borrow money from? Here’s a nifty chart the Washington Post put together in December 2014. We’ve borrowed more money since then, but this will give you an idea. The United States has borrowed the most money from China and Japan.
The Deficit
The deficit is the spending that exceeds the revenues (aka the government spends more money than it brings in from taxes). Deficit is a term typically used in reference to government spending, rather than individual or business spending. If there is a deficit, that means that the budget isn’t balanced and the government needs to borrow money (see debt ceiling).
What is the current deficit? As of this past May, the deficit for the 2017 fiscal year (FY 2018), which goes from October 1, 2017 through September 30, 2018, is $440 billion. The United States is projected to spend $4.094 trillion dollars in FY 2018, but the government is only projected to bring in $3.654 billion in revenue.
Why is there a deficit? Well, there are a number of reasons. The United States has consistently been at war since 2001, which has increased spending over time. Additionally, mandatory spending (think Social Security and Medicare) has increased over the years and add up to roughly $2 trillion. There are also lasting effects from the stimulus package that pulled the United States out of a recession in 2009 and the fact that revenues brought in from taxes are low (partly a cause of the recession, partly because of the United States’ tax structure). However, having a deficit isn’t a bad thing, necessarily. The more the government spends, the more it stimulates the economy… which is always beneficial.
Can the deficit be reduced? Absolutely! The ultimate goal is to have a balanced budget or a budget surplus (aka bringing in more money than the government actually spends). Congress took steps to reduce the deficit for FY 2017, but it did not eliminate it. In fact, the last time there was a balanced budget and no deficit was in the 1990s under President Bill Clinton. During his administration, the United States went from having a deficit of $290 billion to a surplus of $128 billion. How did they do this? By raising taxes! It is very possible to have a balanced budget… but it does require work and common sense tax reform. The Congressional Budget Office’s report on the budget for FY 2018 predicts that if current laws do not change, our deficit will increase and so will our overall debt… both of which could reach all new highs by 2027. (You can read the CBO report yourself here.)
Government Shutdown
A government shutdown is exactly what it sounds like — all non-essential government offices cease to function in light of Congress’s inability to pass an appropriations bill to fund discretionary spending. Essentially, Congress did not pass the budget in time for the next fiscal year and funds have not been allocated to the departments, agencies, etc. that need government funds to operate. There is typically only a concern of a government shutdown near the beginning of the next fiscal year, but that isn’t the only time. . If Congress passes a continuing resolution to fund the government for a limited amount of time while the parties come to an agreement on a full budget, the government can be shut down at other points in the year.
Does the government actually stop working during a shutdown? Basically. A lot of staff is asked to stay and work without pay (Congress goes back and retroactively pays them for the time later) to keep essential offices — like Congress — running during a shutdown. Otherwise, most offices, departments, and agencies that receive government funding close. This impacts passport applications, Social Security card applications, and many other things. However, it does not impact agencies like the Federal Reserve or the Post Office. The Office of Management and Budget loosely defines “essential personnel” and there isn’t really a full list released. However, essential personnel are typically folks whose jobs are to protect life and property, air traffic control and flight, or those who provide essential benefits.
Overall, there have been eight federal government shutdowns that have led to the furlough of government employees. The last full shutdown was roughly four years ago — October 1–6, 2013. Prior to the last shutdown, the Washington Post published a great piece on the background of the previous seven shutdowns, which you can read here.
Government shutdowns are not catastrophic and often don’t last long enough to impact the country as a whole. They are frustrating (and sometimes entertaining) to folks who live in Washington, DC, as many are asked to work without pay and some of the local facilities are impacted.
___________________________________________________________________
These three topics are likely to come up in the next few weeks as Congress works to pass the FY 2018 budget. Get ready, be prepared – it’s gonna be an interesting ride.
