United States Debt Ceiling
United States debt ceiling refers to a legislative mechanism that limits the national debt that the treasury can issue. It does this by setting a limit on the amount of money that the government can borrow. Debt ceiling is also called debt limit. It gives an aggregate figure that applies to gross debt including debt in the public hands and intra-government accounts.
Debt ceiling does not cover about 0.5 percent of debt. Government deficits are not limited directly by debt ceiling because separation legislation does not authorize expenditures. In effect, this legislation can only limit the treasury from making payments for the expenditures after reaching the limit but they must have been approved and appropriated in the budget.
The Second Liberty Bond Act that was enacted in 1917 created the U.S debt ceiling. It put a ceiling on the bond that the United States is allowed to issue. By the end of the financial year 2011, the United States debt ceiling was at $14.3 trillion.
Before the creation of debt ceiling, the president of the United States was allowed to control the finances of the country. To ensure that the president exercised financial responsibility, the United States debt ceiling was established during the First World War. Over the years, this debt limit also called the statutory debt limit has been increased whenever the country nears it.
If the United States hits the limit and misses interest payments to bondholders, it would default this limit and this would lower credit ratings while increasing debt’s cost. However, when the U.S reaches the debt ceiling without having made an enactment on the limit, Treasury adopts extraordinary measures that are aimed at financing expenditures by the government temporarily. The treasury makes this its obligation until a resolution is reached.
The extraordinary measures have never been exhausted by the treasury or resulted into a default although on several occasions it has appeared like Congress would allow the treasury to default the limit. Nevertheless, it is not clear whether the treasury would prioritize debt payments to avoid defaulting bond obligations if this happens. However, the treasury would default some non-bond obligations if this happens.
Several economic problems could be triggered by a protracted default including an output decline and financial crisis that would lead the U.S into a recession. This makes public debt management a crucial aspect of macroeconomics in the United States financial and economic system. The United States debt ceiling constraints the ability of the executive to manage the economy.
However, debate continues regarding the way the economy of the U.S ought to be managed as well as whether the United States debt ceiling is the appropriate mechanism to use in restraining spending by the government.
Controversy has also existed over the constitutionality of debt ceiling. The 14th constitutional amendment states that public debt’s validity shall not be questioned as long as the law authorizes it. Debt ceiling does not exist in most democratic countries which makes the United States an exception.
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