On Oct. 17, the U.S. will reach the debt ceiling, an occurrence that historically has been avoided with an increase of the nation's debt limit. Meanwhile, the nation's budget deficit remains a topic for politicians, economists and taxpayers, during budget time and when the debt limit has threatened. Dr. John Scott, professor of economics in the Mike Cottrell College of Business at the University of North Georgia, talks about the difference between the debt ceiling and the deficit and what they mean for the country.
How do the national debt and deficit differ from each other?
The U.S. government borrows in order to spend more than it receives in taxes. One year's borrowing is the budget deficit. Because the U.S. continues to run deficits year after year, the deficits add up to a number called the federal debt, which is the total amount that the US government currently owes. It is like a consumer's credit card. The consumer overspends by charging things on the card—the charges are like the deficit. But if this happens time after time, the credit card balance builds up—like the federal debt.
Why is an increase of the debt limit so important?
Voters do not like government overspending, so politicians enacted a law to limit that overspending—the debt limit. Because the overspending continues, politicians either raise the limit or violate the law. It is like getting a new credit card when your old cards are maxed out. Three things are important in this consideration. First, the government receives tax dollars to pay for spending, so if politicians cut spending down to equal those tax dollars, they would not need to increase the debt limit. So reaching the limit does not mean all spending must stop; it just means that from now on spending must equal tax revenues. Second, the government owns some of its own bonds under the heading of the Social Security, Medicare, and Medicaid trust funds. If the government reached the debt limit, they could sell those trust fund bonds and use the money from the sale to pay Social Security, Medicare, and Medicaid bills, without borrowing more. Third, "default" means that the government can't pay its debt—like a consumer not able to pay monthly credit card bills. However, the tax dollars the government receives can pay those debt payments 12 times over, so any government default on the debt would be voluntary.
What does it mean that the deficit is decreasing while the debt limit likely must increase?
If the U.S. government is at the debt limit, it can't borrow any extra dollars, and running a deficit means you borrow extra dollars. It is like if a consumer charged $1,000 last month to the credit card (a deficit), putting the consumer at the $15,000 debt limit. If the consumer wanted to borrow only $400 this month (deficit), the consumer could not do so, even though it would be a lower deficit than last month. To borrow more, the consumer needs another card, meaning a higher debt limit.