Red Ink: The Debt Ceiling and Deficit Spending

This week, Craig Siminski, of CMS Retirement Income Planning, shares with us an article providing an overview of new projections from the CBO for future deficits and the national debt:

On January 19, 2023, the outstanding debt of the U.S. government reached its statutory limit, commonly called the debt ceiling.

The current limit was set by Congress at about $31.4 trillion in December 2021.

On the day the limit was reached, Treasury Secretary Janet Yellen instituted established “extraordinary measures” to allow necessary borrowing for a limited period of time. While Yellen projects the extension will last until early June, the Congressional Budget Office (CBO) estimates it may last until sometime between July and September.

However, the CBO cautions that if April tax revenues fall short of its projections, the Treasury could run out of funds earlier.

Flexibility vs. Fiscal Fights

A debt ceiling was first established in 1917 to give the federal government more flexibility to borrow during World War I. Before that time, all borrowing had to be authorized by Congress in very specific terms, which made it difficult for the government to respond to changing needs.

The modern debt ceiling, which aggregates almost all government debt under one limit, was established in 1939. Since 1960, it has been raised, modified, or suspended 78 times, mostly with little fanfare.

That changed in 2011, when a political battle over the ceiling pushed the Treasury so close to the edge that Standard & Poor’s downgraded the credit rating of the U.S. government.

The debt ceiling limits the amount that the U.S. Treasury can borrow to meet financial obligations already authorized by Congress. It does not authorize future spending. However, beginning with the bitter battle of 2011, it has been used as leverage for partisan negotiations over government spending.

With the White House and the House of Representatives — which must authorize spending — held by different parties, this year’s negotiations could be particularly difficult.

Potential Consequences

If the debt ceiling is not raised in a timely manner, the U.S. government could default on its financial obligations, resulting in unpaid bills, higher interest rates, and a loss of faith in U.S. government securities that would reverberate throughout the global economy.

While it’s unlikely that the current situation will lead to a default, pushing negotiations close to the edge can be damaging in itself. It was estimated that the 2011 impasse cost U.S. taxpayers…

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Craig Siminski is a CERTIFIED FINANCIAL PLANNER™ professional, with more than 25 years of experience. His goal is to provide families, business owners, and their employees with assistance in building their financial freedom.

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