The issue of debt ceiling and its existence due to fiscal cliff has been the center of attention for the international media. There’s a lot of drama to catch up on between the fact and figures of the debt ceiling and the fiscal cliff.
What Is Debt Ceiling and Why It Came Into Existence
For people who read less or are little familiar with what’s going on with the U.S economy, the debt ceiling is Congress’s method of handling how much money its Treasury can borrow. At present, the debt limit is set to $16.39 trillion. In fact, the Constitution allows the Congress to manage federal spending and borrowing. The congress then taps the Treasury set up by the government to manage the directives. In real, when the planned out spending do not match the tax revenues, the situations result into government borrowing money from external sources.
During the early years, the case of borrowing money was managed within the defined parameters of the Congress. However, the Senate and the House have agreed upon total debt limit for more than seventy years now. In fact, the ceiling has been regulated in an upward trend more than forty times after 1980.
A lot of budget experts urge that the cap is not required in the case and it essentially facilitates for sporadic show off by the lawmakers regarding self-created debt issue. The implication of caps to date has benefited quite little to evaluate the increase in the debt amount of the country.
How Does The Debt Ceiling Correlates With Fiscal Cliff, The Deficit And The Budget?
In reality, debt ceiling has no impact over the budget, the fiscal cliff and the deficit since debt ceiling is absolutely a different area. Increasing the debt ceiling will in no case avert fiscal cliff or have an impact over it nevertheless. Instead, the vote to increase the debt ceiling is only a political bargaining gimmick only because debt ceiling is significant and the Republicans wish to exploit it in order to ensure their victory over certain essential points.
During normal years, usually the debt ceiling has no association deficit information and discussions. Every year, the Congress inflates the debt ceiling without any tussles or complaints. However, during 2011, a new standard was established that required all Republicans, who wished to coerce the Democrats, to vote over a new-fangled budget. They wanted negotiating power and hence the Republicans said that they would never vote in order to inflate the ceiling until and unless the President conferred them what they asked for with respect to the budget. In fact, the U.S came defaulting on all its bills within hours.
This matter resulted into a deadlock as per which the Democrats and the President agreed to postpone the issue for the next 17 months. Hence, all in all, the debt ceiling is all ready for another vote, whereas there’s a budget battle all over again. This means that the issue of debt ceiling is most likely to be a significant bargaining chip in the dialogue pertaining to the fiscal cliffs.
The matter that put many minds into thinking about the future of debt ceiling is that what would happen if the Treasury hits the debt ceiling. Last year, the Treasury had taken some solid steps to stop paying certain bills until the next few months, for example, not investing money into certain government pension funds. The Treasury believes it can take solid measures to save $200 billion on a temporary basis by choosing not to pay those bills presently.
In fact, the U.S government spends around $100 billion per month. This facilitates the Treasury with a time period of around two months before it has to cut off other miscellaneous payments of default. When debt ceiling is inflated, the Treasury will have to pay $200 billion that it owes to the state government or pensioners.
Right now the deficit of the US is approximately $1.3 trillion. The Treasury needs to balance out its budget by ensuring that their debts in no way exceed their income. It is really necessary to balance the budget in order to lower the deficit and ensure that the longer term debt is manageable as well as that it is also being paid down.
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