Thomas Sargent and Cutting the deficit

The Difference Between the Shutdown and the Debt Ceiling

by Elaine Schwartz    •    Oct 11, 2013    •    390 Views

Let’s just do a shutdown and a ceiling primer today.

The shutdown is all about the federal budget.

Very simply stated, certain agencies need yearly (or a different time period) funding that has to be approved by the President and the Congress. Because the President and the Congress cannot agree on a federal budget, the money for these agencies has not been formally allocated to them. So they cannot do any spending until they get the Congressional/Presidential okay. Even if there is no federal budget, that “okay to spend” can come from a Continuing Resolution (CR) that the President and the Congress both have to approve.

So far, there is no “okay to spend” agreement.

The debt ceiling is all about borrowing.

Hoping to prove that it was the “boss,” in 1917 the Congress said, “We will decide the maximum amount that the government can borrow.” It knew that the maximum amount would keep on increasing. So all that is happening now is that we are about to reach the last maximum amount that Congress approved. And they have to say it is okay to borrow more.

Almost always, the US borrows money by selling securities like bonds to countries, individuals, businesses and US government agencies. These securities are just IOUs that have to be paid back on a certain date. Because we usually owe more than we pay back, the size of our debt gets bigger and bigger.

Because US expenditures are more than its revenue, we have to keep borrowing. We have always been able to continue borrowing because everywhere lenders know we pay back what we owe exactly on time. If the debt ceiling is not raised by the Congress, we might not be able to borrow what we need to pay on time what is due to everyone from the US government. As a result, our future borrowing ability will be constrained.

Do the shutdown and the debt ceiling relate to each other?

The shutdown is about federal spending.

The debt ceiling is about borrowing the money that enables us to do the spending.

Sources and resources: To read more, do look at these past econlife posts:

Federal Budget: Some Shutdown History

What We Need to Know About the Debt Ceiling

During the Shutdown, Who is “Essential?”

The Debt Ceiling and the Sequester

All You Need To Know About the Federal Budget Process

Another Debt Ceiling Debate

 

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