Fiscal Responsibility and the Federal Debt Ceiling

If you’ve been watching the headlines you’re probably aware of the October 1 deadline to approve the federal budget for the upcoming fiscal year. As you probably would guess, little has been done so far in the approval process.

The budget approval raises concerns most every year, but with the deadline approaching and essentially no progress made thus far, the media is becoming increasingly worried we will enter another partial government shutdown as we did back in 2013.

Will Congress decide to raise the debt ceiling and avoid a shutdown? Only time will tell. Congressional budget approvals and everything that goes along with it can be a little confusing. We’ve covered the main points you should know about it below.

Understanding the Debt Ceiling

Just as you have a line of credit in your personal life or for your business in which you incur debts over time, the United States is the same way. The same way you bring in an income, the United States brings in revenue each year from taxes. The U.S. Government has been spending more than it makes for decades now, and is about to run up against its credit limit once again. This credit limit is better known as the debt ceiling.

The debt ceiling is most relatable to the limit on your credit card. It’s the maximum amount to which the federal government is allowed to borrow each year. And once you reach that limit, you should make an effort to pay it off. In the case of the United States, it’s time to reset the limit, because Congress has no intention of paying off any part of the debt. (For related reading, see: Treasury's Mnuchin to Congress: Raise Debt Ceiling.)

So, what seems to be holding up the federal budget? At this given time, political agendas seem to be the biggest red light in the approval process of the federal budget.

Should the United States Aim for Zero Debt?

Although in standard practice we are taught to avoid debt at all costs, it’s not necessarily a bad thing that this deficit exists. Deeming the United States as fiscally responsible doesn’t directly correlate to a zero deficit. Therefore, fiscal responsibility in terms of the federal government doesn’t mean they can’t borrow more by raising the debt ceiling, but instead implies that they need to be spending the money they borrow more wisely.

Most people are left scratching their heads wondering why we aren’t doing something to reduce the deficit. The political environment strongly impacts the deficit and what happens to it. Does it grow or do we make strides to shrink it?

Is a Government Shutdown in Our Future?

Only time will tell as we approach the October 1 deadline whether or not Congress will come to a decision and get the budget approved. If they can’t come to an agreement, we may be looking at another partial government shutdown.

Until then, keep your eyes on the headlines.

(For more from this author, see: How the Federal Reserve Impacts Investors Like You.)