Just the Basics on Deficits and Debt (and Interest)

With all the talk in Washington these days on shrinking deficits and debt, we’ve updated our backgrounder on deficits, debt, and interest — three important budget concepts that are often misunderstood.

Among other changes, we’ve added a section on the debt limit.  It explains:

Congress has exercised its constitutional power over federal borrowing by imposing a legal limit on the amount of money that the federal government can borrow to finance its operations.  The debt subject to that limit differs only slightly from the gross debt. Thus, it combines debt held by the public with the Treasury securities held by U.S. government trust funds.

Once the debt limit is reached, the government must raise the debt limit or default on its legal obligation to pay its bills.  Congress has raised the debt limit more than 90 times since 1940.

Raising the debt limit does not directly alter the amount of federal borrowing or spending going forward.  Rather, it allows the government to pay for spending on programs and services that Congress has already approved.

Nor is the need to raise the debt limit a reliable indicator of the soundness of budget policy.  For example, Congress had to raise the debt limit a number of times between the end of World War II and the mid-1970s, even though the debt-to-GDP ratio fell significantly over this period.  Similarly, debt subject to limit rose in the late 1990s — even though the budget was in surplus and debt held by the public was shrinking — because Social Security was also running large surpluses and lending them to the Treasury.