Debt Limit or Limitless Debt: How Congress Will Decide America's Financial Future

Jan 23, 2023

Each year's federal budget must be approved by Congress and signed by the President. Despite agreeing on a budget, the federal government will likely not raise enough tax revenue to match its spending projections. Last year’s budget included over $6 trillion in spending, but only $5 trillion was collected in tax revenue. All levels of government, including state and local governments, set budgets that allocate tax revenue toward various projects. Some require those budgets to be balanced while others do not.

Congress has the authority to approve spending budgets that are larger than the expected tax revenues, but only to a certain limit. Budgets can change a lot in a short amount of time because of unexpected events that disrupt spending or tax revenue. When this limit is reached, the government can no longer borrow money and must either increase the debt limit or reduce spending in order to continue its operations.

The U.S. government has already spent $1.45 trillion this fiscal year and is on pace to hit its debt limit around June unless Congress agrees to raise the limit. The U.S. has run budget deficits – it spends more than it brings in through taxes and other revenue – for the past two decades, which means that it must borrow each year to pay its bills. The last time the U.S. had a budget surplus was over 20 years ago:

There are costs and benefits to running budget deficits, but people often only focus on the negative aspects of incurring debt. Many of us look at the federal government’s predicament and try to imagine what we would do instead. While some people follow a budget, nearly 3-in-4 don’t follow one at all and 65% of Americans don’t even know how much money they spent last month. That’s okay! The federal government isn’t the same as a household and it keeps much better track of how much it spends.

Keep in mind that debt isn’t inherently bad, contrary to what you (or your friends) may have heard from Dave Ramsey. Debt can actually help in a lot of situations because there are different types of debt. Taking on debt to purchase a house is a better use of debt than buying a new PlayStation. Similarly, the government must make strategic decisions when creating its annual budget, balancing the use of debt for necessary investments such as infrastructure and economic stimulus during crises, with the need to maintain some semblance of financial stability.

These spending decisions fall under the category of fiscal policy. Governments have various macroeconomic goals and these expenditures are the means by which to achieve them. Some people may be concerned that the government's debt is so large that it will result in bankruptcy, but it's important to note that bankruptcy is not caused by the size of debt, but rather by the inability to keep up with interest payments on it. Similarly, people do not enter into bankruptcy solely because of the size of their mortgage, but rather when they are unable to make their monthly mortgage payments.

In the previous fiscal year, the government only spent $475 billion on interest payments, which may seem significant but was actually only 8% of its total expenditures. The top items on the budget were social security at $1.22 trillion and health-related projects at $914 billion. In fact, the majority of federal spending falls under the category of "human services" such as education, training, employment, and social services. It's important to note that many people argue that Congress should reduce spending, but they often overlook the fact that a large portion of the budget is considered mandatory spending, which is legally required to be spent and makes up around 63% of total expenditures. On the other hand, discretionary spending, which is approved annually through Congressional appropriations, offers more flexibility for Congress to adjust.

Some people argue that accumulating a large amount of debt today will result in future generations having to bear the burden, but it's important to note that the debt doesn’t actually ever have to be fully paid off. The United States only needs to keep up with interest payments on the debt. If the debt incurred today is used as an investment to improve future productivity and earnings, future generations will have a higher income to cover those interest payments. This is similar to the reasoning behind many college students taking on debt to finance their education.

It's important for families to maintain a budget and avoid excessive debt, but the United States government is not the same as a household. It doesn’t have the same borrowing limits that many families face, and can raise taxes, print money, or borrow from other countries. Households do not have the same flexibility. Each option has its own advantages and disadvantages, but the government has the ability to take on more debt, which is something households cannot do.

Claudia Sahm

has a great post from last year when this debate was happening among some of the more prominent macroeconomists.

Yes, **you can donate money** to the government to pay down the public debt.

The debate over the debt ceiling is significant because if it is not increased, the government may default on its debt payments. This would have severe economic consequences including higher interest rates and possibly a recession. For ordinary Americans, a default on government debt payments could lead to financial instability and make it more difficult for them to obtain loans for things like mortgages or car loans. Additionally, if the government were to implement significant spending cuts to avoid reaching the debt limit, this could result in reduced funding for important programs and services that many Americans rely on and are entitled to.