Posted in Finance, Accounting and Economics Terms, Total Reads: 76
Definition: Debt Ceiling
Debt ceiling refers to the maximum limit of funds or money that a government can borrow. The government of a country have to spend continuously to improve the country even when they don’t have money to do so. Thus the government have to take loans in order to manage the expenditures like paying interest for other debts, military salaries, Medicare benefits, tax refund etc.
Debt ceiling usually refer to the U.S. government borrowing limit; the government borrow through treasury bills. The U.S. government can borrow as much as they can until it reached the debt ceiling mark then the congress that either decide to increase the debt ceiling mark or to declare default on the debts they have taken. Moreover, the government can’t even stop taking debts because this will lead to unhappy public investors. Thus the federal government have to increase the debt ceiling time to time.
If the debt ceiling is not increased this will all lead to default of federal government, thus all treasury bills will fail. This will reduce the credit rating leading to unhappy investors. The government have to cut the expenses. It will affect the economy drastically as stock prices will fall, increasing of taxes which will reduce the people’s spending. It can lead to financial crises and thus leading to loss of jobs. It can shake whole world economy as all developing economies are dependent on the U.S. economy. Moreover, increase in debt ceiling does not mean that government can spend more but it helps to pay back the debt obligations that has already been made by government.
The increase in debt ceiling is the sign of government not able to pay their debts. It can lead to falling into debt trap which can lead to “shutdown of government”. It shows ballooning debts of federal government.
If the debt ceiling is hit many investors will remove money from economy and invest somewhere else. So thus raising debt limit is always a controversy in U.S.A.