By J. Randolph Evans

The recently averted federal government shutdown has increased the focus on the federal budget crisis. Politicians (and talking heads) throw around words like ‘federal deficit’ and ‘federal debt’ as if they were interchangeable. Yet, these words actually mean very different things. In today’s world of spend, spend, spend, understanding these words and their implications has never been more important.

‘Federal Deficit.’ First, and importantly, the federal deficit is not the same as the federal debt. The deficit is what happens when the government spends more than it takes in. The shortfall is the deficit. (Although only a distant memory now, a ‘surplus’ is what happens when the government takes in more than it spends.)

Contrary to popular belief, deficits are not a necessary evil of government. Indeed, for much of the country’s history, the federal government did not spend more than it took in. In fact, most states (like Georgia) actually prohibit their state governments from spending more than they take in.

‘Federal Debt.’ For each year that the government spends more than it takes in, it incurs debt. Basically, the government must borrow the money it spends, but does not have. This is the federal debt. As a result, the federal debt comes from federal deficits.

There are two different places from which the federal government borrows money.

First, it borrows money from itself. The most common source is the Social Security Trust Fund. Basically, individual Americans pay Social Security taxes into a trust fund to be held in trust until they reach retirement. Rather than hold those funds in trust, the federal government takes the cash out of the Social Security trust fund and replaces it with an IOU from the federal government backed by American taxpayers.

Second, the federal government borrows from the public. Under this category, the federal government borrows money from individuals, corporations, and others. Increasingly, the holders of the government IOUs are foreign governments, institutions, and people.

‘Federal Debt Ceiling.’ There is actually a limit (a ceiling) on just how much money the federal government can legally borrow. It is a credit limit. The current federal debt ceiling is $14.294 trillion dollars.

Most Washington-watchers believe that the federal government will reach its credit limit in May 2011. Reaching the credit limit is different from running out of money. Here is the difference.

In order for the federal government to operate, the Congress has to ‘appropriate’ money. Basically, this is the amount of money that the government can spend.

In ordinary terms, this is the amount of money that the Congress has put in the government’s checking account to spend. When the appropriated funds (i.e., the money the Congress has put in the government’s checking account) runs out, then the federal government shuts down. This is what happened most recently when the federal government came close to running out of money.

The most recent budget compromise appropriated enough money to fund the federal government through September 2011. Unfortunately, a lot of that
money is borrowed because the government spends more than it takes in (the federal deficit), and year after year fails to pay back what it has borrowed (the federal debt).

So, deficits add up to debt until the government hits the debt ceiling. When that happens, the Congress and the President have a choice to make. Stop or keep going.

For the past decade, politicians have increased how much the government can borrow, which enables it to spend more than it takes in, which in turn creates more and more debt until the government reaches its new debt limit. Then the process starts over again.

To end this vicious cycle, three things must happen. First, the government has to stop spending more than it takes in.

Second, the government has to start paying off its over $14 trillion debt. Even at the lower interest rates of the last few years, the federal government is spending hundreds of billions of dollars on interest, which is now the fourth highest budgeted item in the federal budget. Unfortunately, under the current plans ($4 trillion over 12 years), it would take 42 years to pay off the current federal debt assuming the government stopped its deficit spending.

Third, the Congress and the President must stop increasing the federal debt limit. So far, neither the President nor the Congress has had the willpower to break the cycle of more and more debt.

There is a better way. Let the American people decide whether to raise the federal debt limit. Specifically, adopt a law that says the federal debt limit can only be raised if a majority of Americans vote to raise the federal debt limit. Let the people who have to pay back the debt decide whether to borrow more.