We keep hearing about the debt ceiling on the news and many people simply don’t understand what the big deal is. This blog post is meant to help explain it in simple terms.
The debt ceiling is a limit set by the federal government on the amount of debt that it can legally accumulate. This limit is set by the United States Congress and is typically raised periodically to accommodate the government’s borrowing needs.
The debt ceiling is not to be confused with the federal budget deficit, which is the annual difference between government spending and revenue. The debt ceiling instead refers to the total amount of debt the federal government can have outstanding at any given time. The current debt limit is set at $31.4 trillion.
The debt ceiling is necessary because, as the government incurs expenses, it must borrow money to cover the difference between its revenue and spending. This borrowing results in the accumulation of debt. The debt ceiling is put in place to ensure that the government does not borrow more than it can reasonably pay back.
When the government reaches its debt limit, it can no longer borrow money and is forced to take action to reduce its debt. This can include cutting spending, raising taxes, or a combination of both.
The practice of raising the debt ceiling is also an option but has been a contentious topic in U.S politics, with some arguing that it allows the government to continue to rack up debt without consequences, while others argue that it is necessary to ensure the government can continue to function and pay its bills.
In recent years, there have been several political battles over raising the debt ceiling, with some members of Congress refusing to vote in favor of raising the limit unless certain policy demands were met. This has led to government shutdowns and uncertainty in the financial markets.
We recently hit the limit on the debt ceiling and a decision will need to be made by congress on how to deal with it. Until that happens we very well may see more headlines about it but now that you’ve read this post, know a little bit more about what all the fuss is about.
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