THIS WEEK much of America’s government shut down when Republicans and Democrats failed to agree on a budget. Soon, America will hit a more disruptive deadline: its statutory debt ceiling. What is it, and why does it matter?
The first thing to clarify is that a government shutdown due to failure to pass a budget and a shutdown due to failure to raise the debt ceiling are different things with different implications. In America many government functions—such as defence and the national parks—must be funded by annual acts of Congress called appropriations. If Congress fails to appropriate funds, the activity must cease, with exceptions for essential services. Shutdowns are disruptive and a bad way to make policy but do not force the government to renege on anything it had promised to do. The debt ceiling is different. Congress has from America’s earliest days placed limits on how much debt the Treasury may issue. From 1917 to 1935, Congress gradually granted the Treasury more flexibility until a single debt ceiling was established. The debt ceiling only matters when the government runs a deficit. If it collects $20 in taxes and has $25 in spending commitments, it must borrow $5, raising the national debt by $5. But this can put different laws in conflict. Congress may bless spending and tax laws that arithmetically compel the government to run a deficit, but not authorise a high enough debt limit to finance that deficit, so the Treasury could not meet some of its legally required spending commitments. America shares this quirk with almost no other countries (Japan and Denmark have a debt limit but for a variety of reasons, neither pose serious constraints on the government’s actions).