The debt limit is an important part of the process of the U.S. government managing its budget. This is because the federal government has the obligation to pay its bills for the money that it already owes. But the debt limit is also used to apply pressure on Congress to pass a budget bill.
When Congress has not approved a budget, the Senate has to approve a temporary measure known as a continuing resolution. In this situation, the Senate temporarily halts spending levels. If a budget is not passed, government funding will run out at 12:01 a.m. on 2 January 2019.
This is an important tactic for the Senate, which wants to pressure Congress to get a budget agreement before the deadline. However, this is very different than using the debt limit as a negotiating tool.
Why did Congress create the debt limit?
An essential requirement for the creation of a country is establishing a financial system. Thus, after the end of the Civil War, Congress passed the constitution of the United States. In order to establish a strong, stable and sovereign financial system, Congress created the debt limit. It gave Congress control over the issuance of debt instruments. However, it also set requirements of the expenditure of the government.
As long as the country’s debt level does not rise above a certain number, it can issue new debts without massive repercussions. In other words, the debt ceiling created a way to guarantee that the U.S. would have enough money to pay its bills.
If Congress fails to approve the U.S. budget, the economy will suffer. Without a budget, the U.S. is no longer able to take care of its priorities.
Given that the U.S. is the world’s biggest creditor, the failure of the government to pass a budget can have a catastrophic effect on the financial system. Therefore, some national and foreign entities are required to limit their dealings with the U.S. debt.
What debt ceiling amount does the U.S. government need to run a balanced budget?
In order to govern itself, the U.S. government needs to know how much money it has to spend. Without knowing this information, the government cannot adequately plan its spending.
In addition, there is no way to count the money that is already spent. Because of this, the federal government cannot balance its budget without increasing taxes or reducing expenditures. Therefore, the debt limit sets a limit on the number of accounts that the government can spend money from.
The legal limit for a set number of accounts is set by law. The total amount of the accounts for a given year is also equal to the total amount of gross debt. So, if the government decides to spend $1 trillion, the total amount for its accounts is $1.1 trillion. The administration uses this total amount as a bargaining tool. The amount that the government needs to finance its spending is lower because of the debt limit. However, the U.S. can always borrow more money if it chooses to do so.
This article originally appeared on CBS MoneyWatch.