US budget deal elusive as deadline looms large

The US debt limit: Why it's an issue now

What is the debt limit and why does the US have one?

The debt limit is the total the US Congress has allowed the government to borrow to meet obligations. The treasury notes the debt limit “does not authorise new spending commitments. It simply allows the government to finance existing legal obligations that Congresses and presidents of both parties have made.”

Introduced during World War 1, the debt limit gives Congress the power to keep government spending in check – a responsibility some critics argue the Tea Party-powered Republican majority in the House of Representatives has taken to extremes.

Why is it an issue now?

The $16.4 trillion borrowing limit is scheduled to be breached on December 31st. The US is only about $95 billion away from its debt ceiling.

US treasury secretary Tim Geithner said the treasury would halt the issuance of special securities primarily purchased by local governments to give the federal government more time to finance its operations before its borrowing authority is shut off.

The US issues new debt to finance the operations of government, such as paying salaries to members of the military, building projects and payments on existing debt.

The suspension of the securities issuance, along with other “extraordinary measures” that Mr Geithner detailed, such as fiddling with federal government employee pension funds and a government account used to buy and sell foreign currencies, amount to little more than accounting measures.

The moves will give the US a $200 billion cushion but the treasury will only get about two extra months before it hits the debt limit.

How does this all fit in with the fiscal cliff?

In the view of some, it gives House Republicans a powerful tool they can use to bludgeon the White House and extract concessions during the fiscal cliff talks.

The US treasury’s website states: “Failing to increase the debt limit would have catastrophic economic consequences. It would cause the government to default on its legal obligations – an unprecedented event in American history. That would precipitate another financial crisis and threaten the jobs and savings of everyday Americans – putting the United States right back in a deep economic hole, just as the country is recovering from the recent recession.”

– Copyright 2012 The Financial Times Limited