Ch 13: The Federal Deficit and Debt in the Long Term
Part 1: Basics of debt deficit, debt and debt ceiling.
People often confuse between deficit and debt; these two terms are not the same as deficit refers to the act of overspending while debt may refer to the total amount of debts that a person or entity has accumulated over a number of years. Without a deficit, there can’t be debts, so this terms though different still relate. The debt ceiling is the debt limit which if the country reaches, they can’t borrow any more. It’s like a loan limit, but it can be increased or reduced. The Congress regulates the debt ceiling. Congress determines how the funds will be used, so it can’t bar the government from borrowing to be able to run their functions.
The debt ceiling was enacted after world war 1; it was enacted to hold the president liable for the finances of the country. Previously the president had all the power to decide how the finances of a country had to be used. When the debt ceiling is reached, the Department of Treasury has to come up with measures to ensure the country pays its interests and obligations. These measures are enacted to ensure the country can pay its debts and increase its credit rating before the debt ceiling would be raised again to enable more borrowing. If a country is unable to pay its debts to bondholders, then its credit score will reduce, and they won’t be able to borrow more as they won’t be trusted.
Part 2: Government’s financial condition
Difference between debt and operating costs. Seeing how large obligations are for social security and Medicare
The government of America has a deficit of 40 cents in every dollar that is spent. This means that most of the finances the government has are debts. The increased deficit means that the debt to be paid has increased. If the country continues to run on deficits for several years, this will see the debt increase gradually; this increased debt comes with increased obligations that are owed to the bondholders.
If a country runs on debts every time, this means that they have an increased deficit, accompanied by less revenues generated. Thee profits will reduce, and when the obligations become due, there will be increased debt. The government will have to pay unemployment benefits, Medicare benefits, social security benefits to its citizens. When this obligation becomes due, they increase the debt of the country.
Increase in debts of a country affects the economy of the country. The reason for this will be brought about by the increased operational costs. With increases debt, the country has to pay more to settle this debt. The obligations are piling up, and the government may find it hard for them to pay off their debts. The debts of Medicare and social benefits are seen to be interestingly high; this may prompt the government to borrow more to be able to finance the obligations.
The has been an increase in the debt ceiling of America over the years, which has been caused by the various governments. For instance, during the Obama Presidency, we had a debt ceiling of 12 trillion which was later increased to 14 trillion. The spending of the government is more than the revenues it generates, and it won’t be able to pay the obligations owed to the citizens, veterans etc.