Last week, the U.S. government breached the federal debt ceiling, the statutory limit on the amount of borrowing allowed the U.S. Treasury to finance previously authorized financial commitments of the Congress and the President. Without legislative action to raise the cap, America will eventually be unable to pay all of its bills and will in effect default on some of its bonds. This would, of course, be catastrophic for families and the economy, and inevitably the ceiling will be increased. But not before the inevitable brinksmanship and political posturing that has accompanied the process in recent years.
Christopher Hopkins
Understanding the terms in play and putting the fiscal position of the United States in perspective may help to follow the debate in the days ahead.
The official scorekeeper is the Congressional Budget Office, a non-partisan agency responsible for forecasting revenue and expenses over the next 10 years. These estimates inform members of Congress in their deliberations regarding budgetary, tax and borrowing decisions.
A deficit is simply a shortfall. Deficits occur when expenditures exceed revenues over a given period of time (one year for budget purposes). Consider a household with an income of $50,000 last year. With college tuition, a new roof and braces for Junior, expenses totaled $51,500. Our hypothetical family ran a deficit of $1,500 for the year, approximately equal in percentage terms to the Federal deficit. To finance the shortfall, they must either invade their savings or borrow the difference.
For fiscal 2017, the CBO projects a U.S. government deficit of $559 billion, roughly 3 percent of GDP on revenues of $3.4 trillion and spending of $3.9 trillion. Much bigger numbers, but same general principal as our hypothetical family.