The United States has just passed a dubious milestone: the government deficit has ballooned to an all-time, eye-popping high: $14 trillion — $45,300 for each and everyone in the country.
The overall national debt rose above $14 trillion for the first time the last week in December. The part subject to the debt limit stood at $13.95 trillion on Friday and was expected to break above $14 trillion within days.
While the government spending debate has been going on for decades, the upcoming one will center around whether or not Congress will lift the legal debt limit or rework the budget to cut spending in order to stay under the current cap. Either way, a fight is ahead on Capitol Hill, inflamed by the passions of tea party activists and deficit hawks.
Already, both sides are blaming each other for an approaching economic train wreck as Washington wrestles over how to keep the government in business and avoid default on global financial obligations.
The Obama Administration are encouraging Congress to pass the bill allowing the increase. They argue it will help protect the American economy from potential disaster.
Treasury Secretary Tim Geithner sent a letter to Majority Leader Harry Reid (D-Nev.), encouraging him to lift the ceiling. He says failure to increase borrowing authority would be ‘a catastrophe, perhaps rivaling the financial meltdown of 2008-2009.’
“Never in our history has Congress failed to increase the debt limit when necessary. Failure to raise the limit would precipitate a default by the United States,” he wrote.
“Default would effectively impose a significant and long-lasting tax on all Americans and all American businesses and could lead to the loss of millions of American jobs. Even a very short-term or limited default would have catastrophic economic consequences that would last for decades.”
While the issue of raising the debt ceiling is under the political spotlight now, it’s not anything new. The current debt ceiling was raised to $14.3 trillion last year, but under a heavily-Democratic Congress, did not spark nearly the same debate.
In 2006, Democrats – including President Barack Obama – fought against raising the debt ceiling to protest the trillions being spent on the ongoing wars in Iraq and Afghanistan.
Here’s what then-Sen. Barack Obama said on the Senate floor in 2006: “The fact that we are here today to debate raising America’s debt limit is a sign of leadership failure.”
“It is a sign that the U.S. government can’t pay its own bills. It is a sign that we now depend on ongoing financial assistance from foreign countries to finance the government’s reckless fiscal policies,” he added.
Collender, author of “Guide to the Federal Budget,” cites a slew of measures the government can do to delay a crisis. They include leasing out government-owned properties, “the federal equivalent of renting out a room in your home,” or slowing down payments to government contractors.
Collender, now the partner-director of Qorvis Communications, a Washington consulting firm, said such stopgap measures buy the White House time to resist GOP pressure for concessions.
“My guess is they can go months after the debt ceiling is not raised and still be able to come up with the cash they need. But at some point, it will catch up,” and raising the debt limit will become an imperative, he said.
Republicans – who have promised fiscal responsibility – have a majority in the House, and the Democrats are bracing for a tough fight. Newly-elected Republicans are especially nervous about the vote, GOP leaders told the Wall Street Journal.
They added while they expected the vote to raise the debt ceiling to pass, the bill would come with significant cuts. What exactly those cuts would be is unclear.
“Do I want to see this nation default? No,” said the chairman of the House Budget Committee, Rep. Paul Ryan, R-Wis. “But I want to make sure we get substantial spending cuts and controls in exchange for raising the debt ceiling.”
“At some point you run out of accounting gimmicks and resources. Eventually the government is going to have to start shutting down certain operations,” said Mark Zandi, chief economist for Moody’s Analytics.
“If we get into a heated, protracted debate over the debt ceiling, global investors are going to grow nervous, and start driving up interest rates. It will all become negatively self-re-enforcing,” said Zandi. “No good will come of it.” [via Yahoo! News, ABC News and NY Daily News]