There has been a lot of scaremongering about what might happen if Congress doesn't raise the debt ceiling in the next few months, allowing the government to borrow even more money to pay for its inability to spend within its means. While there are many aspects of our budget crisis which should make you scared, the consequences of freezing the debt ceiling really shouldn't.
The debt ceiling is a legislatively set limit on how much money the government is willing to borrow and add to the deficit. Right now it is capped at $14.1 trillion and we are rapidly approaching that limit. Last month we added $41 billion to the total deficit, which is fairly typical. That means we spent $41 billion more in April than the government took in as revenue during that month. That overage is about 13% of total spending for the month.
So when we reach that $14.1 billion cap, only the 13% of total government spending which is paid with borrowed money would be in jeopardy. 87% of what the government does would not be impacted at all. The president and the Treasury Department would then have to decide where to cut spending to cover that 15% over incoming revenue.
The scare tactic here is the claim that the response to this would be to default on our debts, thereby destroying the nation's credit and leading to a plunge in all of our financial markets. The fallacy is that capping spending doesn't mean there isn't still money to spend. The government would still have plenty of incoming revenue and the ability to prioritize how it spends that money.
Interest on the debt is about half as much right now per month as the amount of deficit per month. To keep from defaulting, the government would just need to make sure that the 6.5% of the budget which goes to interest is part of the 87% which is paid rather than the 13% which needs to be cut.
We would only default on the debt if the president and his staff at the Treasury Department deliberately chose to pay other bills and not pay the interest. They're unlikely to do that and provoke the crisis it would create and would reluctantly cut elsewhere instead. In fact, just to be safe, Senator Pat Toomey (R-PA) has introduced the Ful Faith and Credit Act which would require that debt service be paid first before other spending just to guarantee that we would not default. So if we chose to not raise the debt ceiling, defaulting on the debt would not be one of the outcomes.