NEXT UP: THE DEBT CEILING BATTLE

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By Jeanne Sahadi, senior writer

NEW YORK (CNNMoney) — Everybody’s talking about debt. No wonder: The country’s tab is a whisker away from the current debt ceiling.

The rhetoric is already loud, harsh and, at times, misleading. And there is more to come.

To help counteract the half-truths and exaggerations, here are some debt ceiling facts worth noting.

What is the debt ceiling exactly? It’s a cap set by Congress on the amount of debt the federal government can legally borrow. The cap applies to debt owed to the public (i.e., anyone who buys U.S. bonds) plus debt owed to federal government trust funds such as those for Social Security and Medicare.

The first limit was set in 1917 and set at $11.5 billion, according to the Center for a Responsible Federal Budget. Previously, Congress had to sign off every time the federal government issued debt.

How high is the debt limit right now? The ceiling is currently set at $14.294 trillion. As of April 7, the debt subject to that limit totaled $14.208 trillion — or $86 billion shy of the cap. But the total can fluctuate up or down daily.

How is the ceiling determined? Based on policies in place, such as the $858 billion tax cut compromise passed in December, lawmakers have already committed to incurring the obligations that require them to raise the debt ceiling.

“Congress has already passed and the President has already signed legislation that increases spending or decreases revenues. Those decisions have already been made,” said Susan Irving, director for federal budget issues at the Government Accountability Office.

In that sense, much of the political rhetoric is misleading because the money has already been committed and lawmakers are arguing over whether to pay the bill, according to former Congressional Budget Office Director Rudolph Penner.

In fact, politics permeates the whole debate. For instance, lawmakers who want to make hay of the issue may push for a small increase so the debate comes up again soon. Others may want a bigger increase so they don’t have to revisit the debate for awhile.

How many times has the ceiling been raised? Since March 1962, the debt ceiling has been raised 74 times, according to the Congressional Research Service. Ten of those times have occurred since 2001.

Expect more of the same over the next decade. Barring major changes to spending and tax policies, “Congress would repeatedly face demands to raise the debt limit,” CRS wrote.

Why does Congress even bother to set a debt limit? In theory, the limit is supposed to help Congress control spending.

Every time the debt limit needs to be raised, lawmakers and the president are forced to take stock of the country’s fiscal direction.

In reality, however, the debt limit is ineffective in controlling spending and deficits. Budget experts say the right forum for that is the debate over the federal budget: Every year, lawmakers are supposed to decide how much money should be spent.

The problem, of course, is that Congress can skirt the obligation to set a spending target, as it did this year.

When will the debt ceiling be reached? The Treasury estimates U.S. borrowing will hit the debt ceiling by May 16.

The amount of debt subject to the limit can fluctuate on a daily basis. Plus there are steps the Treasury Department can take to stave off the day of reckoning. But Treasury Secretary Tim Geithner said such measures could only buy roughly 8 weeks in letter to Congress on April 4.

What happens if Treasury hits the limit? Again, no one knows for sure since it has never happened. But the going assumption is that no good can come of it.

Treasury would not have authority to borrow any more money. And that can be a problem since the government borrows to make up the difference between what it spends and what it takes in. It uses that borrowed money to help fund operations and pay creditors.

In short, if lawmakers fail to raise the ceiling this year, they will have two choices, both awful.

They could either cut spending or raise taxes by as much as $738 billion just to cover the period from April 1 through Sept. 30, which is the end of the fiscal year. Or they could acknowledge that the country would be unable to pay what it owes in full and the United States could effectively default on some of its obligations.

The first option would be impossible to execute without negative economic repercussions.

And the second option could cripple the economy and send world markets into a tailspin.

“Not only the default but efforts to resolve it would arguably have negative repercussions on both domestic and international financial markets and economies,” according to the CRS.

At a minimum, a default could hurt U.S. bonds, the dollar and investors’ portfolios. “Our bond market and stock market would crash,” Penner asserted.

Will reaching the debt ceiling cause a government shutdown? Not necessarily.

A government shutdown occurs if lawmakers fail to appropriate money for federal agencies and programs.

By contrast, if the debt ceiling is breached, Uncle Sam would still have revenue coming in that could be used to fund the government, Penner noted.

Of course, if it can’t borrow, the government will need to raise taxes or cut spending to continue to meet its obligations in full. To top of page


Article source: http://rss.cnn.com/~r/rss/money_topstories/~3/SHW2Kfg431c/index.htm

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