Fiscal deficit is a budget shortfall, where government spends more than what it earns through tax and other revenues in a year. In 2022, the federal government spent US$6.29 trillion, and collected US$4.87 trillion, resulting in deficit spending of US$1.42 trillion (refers Figure 1). Over the past 50 years, the US government has only run budget surplus five times, and the last time was in 2001.
In order to pay for national expenses while operating under deficit, the government would borrow money by selling different kinds of bonds such as U.S. Treasury bonds. The accumulation of this loan and interest owned by investors who purchase securities is called national debt.
The amount of debt the U.S. government can borrow is constrained by debt limit. The debt limit is the cap on the total amount of money that the U.S. government is entitled to borrow to finance the public finance and financial obligations.
The debt limit is instituted so that the Treasury does not need to ask permission from Congress each time it has to issue debt to pay bills. This would give the Treasury more flexibility in issuing debt and managing public finances.
Once the debt ceiling is reached, the U.S. government will have to raise or suspend its borrowing limit, and if breached, the government will fall into default.
Since its first establishment in 1917, the debt limit has been raised or suspended more than 100 times. Therefore, the U.S. government has never defaulted due to failure to pay on what it borrows.
The national debt topped $31 trillion last year. Officially, the U.S. government reached the borrowing limit on 19 January. The debt limit is set at $31.381 trillion.
Two weeks ago, the gross national debt in U.S. has topped US$32 trillion for the first time. Unlike other countries using debt per GDP debt to set debt limit, the US government rather sets hard limit. The current equivalent figure for the U.S. debt is about 120% (refers Figure 2).
The Congress agrees to suspend the U.S. statutory debt limit by freezing some funding that has been projected for next year and limiting spending to 1% growth in 2025. Reducing spending as the government suspends the debt limit could slow future economic growth, but a decision not to do so could lead to an intermediate government shutdown. This explains Congress’ decision to suspend the debt ceiling and not plunge the government into crisis.
Although the debt ceiling is suspended, this does not mean that the US government has solved the high debt. The government may have to keep borrowing more money to pay the bills, and this will create an additional financial burden for generations to come.
When the suspension expires and if the Treasury runs out of its cash on hand, the U.S. government will default on its debt obligations. This has never happened in American history. If the U.S. government really default, no corner of the global economy will be spared from its repercussions.
Both Republicans and Democrats are concerned about the nation’s high-record debt. However, neither side can provide solid solutions to solve the budget shortfalls.
Why is it difficult for the US government to reduce federal expenditure? If the U.S. government cannot pay bills, social security payment and food assistance will stop. Social security, health and Medicare could take nearly half of total outlays, due to the country’s growing aging population. No spending of any kind is less of a priority, and no payments should actually be delayed when they are due. In addition, millions of jobs could loss and unemployment could rise rapidly. A deterioration in household wealth could cause an economic recovery to reverse into a recession.
