Unless the debt ceiling is raised, at some point in August, the United States Treasury will not be able to pay all of its obligations. The ceiling technically was reached mid-May when the total obligations of the United States Treasury hit the $14.294 trillion cap. Since that time the U.S. Treasury has taken a few extraordinary steps to keep the debt level below the cap and allow the federal government to continue to borrow. However, these measures will not be enough and by the first or second week in August the government will have to choose which bills to pay.
Over the past few months Congress has been attempting to package budgetary measures, various revenue generation plans and expense reductions, with a debt ceiling increase. To date no legislation has cleared both the House and the Senate to reach the President’s desk.
The United States has depended on the ability of the U.S. Treasury to issue debt to fund federal obligations since the birth of the nation, but what if the United States government had not borrowed any money over the past 50 years and relied solely on revenue (taxes, duties and fees) to fund obligations? Come August the federal government will have to select which obligations it will pay and which it will not, because current revenue will not be enough to pay all bills.
In the chart below, when a column for a particular year exceeds 100% it has entered a red shaded area because outlays have exceeded revenue. As a result of spending more than was collected, the U.S. government had to borrow to help fund obligations. Over the past 50 years, the only years that the government had a balanced budget, and could choose to pay down existing debt was in 1969 and from 1998-2001. The black line, total federal outlays for a given year, illustrates that additional borrowing was required during most years.
Federal government outlays, in the chart below, are split into six of the largest categories and one “other” category that includes all other outlays
- Social Security
- Income Security (primarily Federal Employee Retirement and Disability, Unemployment Compensation, Food and Nutrition Assistance and Earned Income Tax Credit)
- Net Interest (Interest paid on exsising U.S. Treasury debt)
- National Defense
- All other Federal Outlays (the largest of which are Transportation, Veterans Benefits and Services, Administration of Justice, International Affairs and Physical Resources)
Revenues are generated from individual income tax, corporate income tax, social insurance tax, excise taxes and various other taxes, fees and duties.
The combination of the six largest federal outlays in 2010 stood at 134% of total revenue collected. Social Security and Medicare expenses alone consumed 54% of all federal revenue in 2010. Unless federal revenue increases, federal outlays are reduced, or both, the U.S. government will continue to have to rely on the issuance of debt to fund the difference between revenue generated and federal outlays. The ability to issue debt, however, currently rests in the hands of the Senate, Congress and the President.