Debt Limit Debate-Fiscal Policy Review

U.S. Treasury Secretary Jacob J. Lew stepped up pressure on Congress to avert a potential default, telling lawmakers in a letter that measures to avoid breaching the debt ceiling will be exhausted on October 17th.


Lew’s letter marks the first time he has set a specific deadline and gives lawmakers a target for raising the $16.7 trillion debt limit. Lew and the President have said they won’t negotiate on the limit, which is tied to payments and bills the U.S. has already agreed to make. Members in Congress want spending cuts to be part of the debt-limit debate.


Without a debt limit increase by October 17th, Treasury Secretary Jack Lew has warned that the United States would have a difficult time paying creditors and operating the government.


The International Monetary Fund urged U.S. lawmakers to quickly find a fiscal agreement to resolve the federal government shutdown and raise its $16.7 trillion borrowing limit by October 17th.


Formally known as the statutory debt limit, the United States debt ceiling or debt limit is a legislative restriction on the amount of national debt that can be issued by the Treasury. The debt limit has been raised 79 times since its creation in 1917, with 17 of these increases occurring over the past 20 years, and the most recent increase passed in August 2011.


The United States has had some sort of legislative restriction on debt since 1917. To control the amount of total debt outstanding, Congress has placed restrictions on Federal debt issuance since the passing of the Second Liberty Bond Act of 1917, which eventually evolved into a general debt limit in 1939. The Second Liberty Bond Act of 1917 helped finance the United States’ entry into World War I, which allowed the Treasury to issue long-term Liberty Bonds.


Periodically, a political dispute arises over legislation to raise the debt ceiling. Until the debt ceiling is raised, the Treasury undertakes what is termed as “extraordinary measures”, which essentially buys more time for the ceiling to be raised.


The United States has never reached the point of default, where the Treasury is unable to pay its obligations. In 2011 the United States reached a point of near default, which in turn triggered the first downgrade of U.S. debt by credit rating agencies.


Internationally, the United States and Denmark are the only democratic countries to have legislative restrictions on issuing debt. Most emerging market countries issue debt freely with little or no restrictions.


Total federal debt can increase in two ways, first by selling debt (such as Treasury bonds) to the public and other countries, and the second by actually buying debt back itself for the purpose of funding government accounts such as Social Security, Medicare, and Transportation.


The debt ceiling at the beginning of 2013 was $16.394 trillion with the limit being reset to reflect cumulative borrowing through May 18th. Even though the debt limit now stands at $16.699 trillion, total outstanding U.S. debt as of September 30th is $16.738 trillion.


Source:  Congressional Research Service, Treasury Dept.



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