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INVESTMENT STRATEGY QUARTERLY

Debt Ceiling Primer

Tracey Manzi, CFA, Senior Investment Strategist, Investment Strategy

UK Editors Notes: Whilst optically of interest largely to US stakes are high, and it appears likely that a deeply divided
readers, the article makes clear that this is a subject of government is headed for another debt-ceiling
considerable significance to investors in financial markets showdown. Divided governments have typically been
more widely. If history is a guide the matter should be good for the markets; however, they often spell trouble
resolved, albeit perhaps at the 11th hour. The experience when it comes to negotiating fiscal matters.
of 2011, to which the writer makes reference, illustrates
the extent to which international markets were unable INTRO TO GOVERNMENT FINANCES
fully to divorce from the drama unfolding on Capitol Hill Everyone has bills to pay, and that includes the federal government.
and provides a salutary reminder of the necessity to reach The government collects revenue through a variety of taxes and
a satisfactory conclusion. uses the funds to pay for everything ranging from Social Security,
healthcare, military spending, education and other priorities
The debt ceiling is back in the spotlight after the US established by Congress. When the government collects enough
government hit its statutory borrowing limit earlier this revenue to cover its spending, it runs a budget surplus. Conversely,
year. While there are steps the government can take to when it does not collect enough revenue to cover its spending
continue paying its obligations, these measures only obligations, it runs a budget deficit. For the last two decades, the
US government has been running a budget deficit. In fiscal year
extend for a limited amount of time. Unless policymakers 2022, the government spent ~$1.4 trillion more than it collected.
can agree to raise, suspend, or eliminate the debt limit The Treasury Department is authorised to cover the budgetary
soon, the government could run out of cash to pay its bills shortfall by issuing new debt. The cumulative amount of money the
as early as this summer. Failure to reach an agreement government has borrowed over time is referred to as the national
would have serious economic consequences, including debt. The US national debt has exploded over the last 20 years,
the risk that the US government defaults on its debt. The rising from $6.4 trillion in 2003 to $31.4 trillion today.

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