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Issue Position: Debt Ceiling

Issue Position

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Why have the President and Congress not reached an agreement on the debt issue?

Two reasons--taxes and spending. The President is insisting on a tax increase, I believe that would be the worst thing to do with unemployment above 9%. The problem is Washington has been spending too much. The problem is not that Americans are under-taxed. It has to be spending cuts that get us back on track.

The President has put forth a number of tax increase proposals, including raising taxes on oil and natural gas and increasing income tax rates at certain income levels that would hit small businesses (since many small business owners file their taxes as individuals)--which would increase taxes on the people who actually create the large majority of jobs in America.

The President is also resisting the spending cuts which many of us believe are necessary. During President Obama's first year in office, spending increased dramatically and the federal deficit more than tripled from the year before. The Stimulus Bill, the Health Care Bill, various bail-outs all cost enormous sums of money. The President is reluctant to agree that these measures significantly contributed to the problem.

If the credit limit is not increased, how much money would the government be able to spend?
Currently, the federal government has to borrow around 40 cents of every dollar it spends on average, meaning that the amount of revenue the government receives through taxes and other receipts is only enough to cover 60 percent of our bills. Without the ability to borrow any more money by reaching the debt limit, the government would only be able to spend what it receives through revenues.

A 40% cut would leave about the amount needed to pay interest costs on the debt and to fund entitlements. But, a majority of the discretionary portion of the federal government -- the military, the FBI, federal prisons, FDA, etc. -- could not be funded. On the other hand, if discretionary programs were funded along with interest on the existing debt, most entitlements -- Social Security, Medicare, veterans' benefits, etc. -- could not be funded.

What would be paid first if a deal is not reached?

The answer is we do not know, and that decision would be in the hands of the Obama Administration. According to the Government Accountability Office, the "Treasury is free to liquidate obligations in any order it finds will best serve the interests of the United States."

This decision will also depend on the amount of tax revenue coming in at the time. Although the federal government only brings in 60 percent of what it spends through revenue, this is on an annual basis. Tax revenue does not come in evenly throughout the year. A lot of taxes are paid April 15, and there are spikes in revenue when quarterly tax payments are due. For example, in February of this year, Treasury only had enough revenue to cover 33 percent of its obligations while in April it had enough revenue to cover nearly 88 percent of expenses.

The Bipartisan Policy Center, a Washington think tank, projects that the government will receive $172 billion in revenues between Aug. 3 and Aug. 31, but it is obligated to spend $306 billion, leaving a shortfall of $134 billion.

Will the President, Congress, and federal employees be paid if a deal is not reached?

With President Obama having discretion about what will and will not be paid, I believe paying himself, Congress, and federal employees would be at the very bottom of this list.

Other questions from folks in our area about the debt ceiling

1. What is the debt ceiling?

The debt ceiling -- sometimes called the debt limit -- is the maximum amount of money that the federal government can borrow. When the government spends more than it receives in revenue, the difference must be borrowed and repaid with interest. The debt limit operates must like a credit limit on a credit card. When the limit is reached, no more money can be borrowed. It is set by law and thus must pass like any other bill by the House and the Senate and be signed by the President.

2. When will the limit be reached?

The Treasury Department announced that the current debt ceiling of $14.294 trillion was reached on May 16, 2011. Treasury also said that it could use "extraordinary measures" to move money around among government accounts to allow the government to operate until about August 2, 2011.

3. Has the debt ceiling been raised before?

Yes. While the government has had some amount of debt since the Revolution, and Congress has always placed restrictions on federal debt, Congress created a statutory debt limit in 1917 that evolved into a general debt limit in 1939 to help prevent the government from defaulting on its financial obligations. The debt limit has been raised six times just since 2007, taking the limit from $8.97 trillion in 2007 to $14.29 trillion today.

4. What happens if the debt ceiling is not raised?

The most truthful answer is that no one knows for sure because it has never happened before. Clearly, the government could borrow no more money. One of the most serious dangers is that the U.S. government could default on its obligations -- that is not paying its creditors the money it owes them. To lose the full faith and credit of the United States would create economic chaos throughout the world.

Of course, even if the debt limit is not increased, there would still be money coming into the federal government through tax collections. That money could be used first to pay creditors and then some other high priority programs. Currently, about 40% of the money spent by the federal government is borrowed, so the budget would have to be cut by that amount.

A 40% cut would leave about the amount needed to pay interest costs on the debt and to fund entitlements. But, a majority of the discretionary portion of the federal government -- the military, the FBI, federal prisons, FDA, etc. -- could not be funded. On the other hand, if discretionary programs were funded along with interest on the existing debt, most entitlements -- Social Security, Medicare, veterans' benefits, etc. -- could not be funded.

5. Why can't the government live within its means?

It can, and clearly it should. Unfortunately, the incredible spending of the last few years has taken us far away from any prospect of a balanced budget in the near term. That is one of the reasons I believe that if the debt ceiling is to be raised, it must include not only immediate spending cuts, it must also include budget reforms that change the way government spends money. We simply cannot continue along this path of spending and borrowing.

One other important point: Even in times of surplus, the government must occasionally borrow money. Tax revenue does not come in evenly throughout the year. A lot of taxes are paid April 15, and there are spikes in revenue when quarterly tax payments are due. In order to send out Social Security and other payments, the government must borrow money throughout the year. That ability would be jeopardized if the debt limit is not raised.

6. How will you vote?

It depends on what I am voting on. I voted against raising the debt limit without cutting spending or enacted budget reforms. I will not vote to continue spending and borrowing as usual. I will have to study specific proposals to see whether they make significant changes. If raising the debt ceiling is an opportunity to get President Obama to sign into law significant spending cuts and budget reforms, I will consider voting for such a measure. But, it must be real cuts and real reform.


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