The Debt Limit and Federal Budget Process Explained in Plain English

Pretty sexy topic, huh? Bear with me.

Congressional leaders and the White House reached a tentative budget deal late Monday that, if approved, would set government funding levels and raise the debt ceiling for the next two years.

The agreement would increase the budget by $80 billion over the next two fiscal years, that amount evenly split between military and domestic spending. It would also increase the amount available for emergency war spending.

The deal is being considered an overall victory for the President Obama who staunchly refused to maintain the across-the-board spending cuts from 2013, known as sequestration. If approved by the House and Senate -- which could both vote on it before the end of this week -- the deal will avoid what has become the routine yearly threat of a government shutdown.

What is the debt limit?

http://www.youtube.com/watch?v=KIbkoop4AYE
Running a nation (as it turns out) is really expensive! And the federal government's revenue stream, which it largely collects through payroll and income taxes, doesn't cover the vast amount it spends.

Although the president submits an annual budget proposal to Congress, that's just a recommendation. It's Congress that ultimately approves the annual budget and determines the federal taxes to pay for it. The president is then legally required to spend the money in the budget with the revenue from those taxes.  But the budget is almost always higher than tax revenue.  And so when the Treasury Department reaches that limit, the president asks Congress to increase the amount it's allowed to borrow in order to pay off its expenses and, literally, keep the government running. This is called the debt limit, or the debt ceiling.

How much does the government spend, and what are they paying for?

In fiscal year 2014, the federal government spent $3.5 trillion, according to the Center on Budget and Policy Priorities. More than $3 trillion of that was financed by federal revenues, with the remaining amount ($485 billion) covered by borrowing.

And that was just for last year. Each year's spending gap gets added on to the nation's ever-growing overall debt: as of Oct. 23, 2015 it was more than $18.1 trillion, according to the Treasury Department.

The majority of the government's spending falls into four areas: defense, social security, major health programs and, to a lesser extent, safety net programs.

Why do budget negotiations seem to get so bitter each year?

The very broad answer is that Republican and Democratic leaders often have dramatically different notions about what government is for and how much should be spent on domestic programs. Republicans typically support military spending, but push for a decrease in spending on social programs generally favored by Democrats.

Ideally, congressional leaders and the president briefly negotiate the terms of a budget and reach a deal that can be submitted to Congress for approval before the September 30 deadline (end of the fiscal year).

In recent years, though, this has been a tortuous process. Bitter disagreement between Democratic and Republican leaders is so common that yearly threats of a government shutdown -- if no budget is approved before the deadline -- have become routine.

In fact, the government did briefly shutdown in 2013  ---from Oct. 1 to Oct. 16 -- because an agreement couldn't be reached before the deadline. And this year, a shutdown was only narrowly averted just hours before the September 30 midnight deadline, when Congress approved a stopgap spending bill to keep the government for another 10 weeks (which is why negotiations are still going on).

How long have we had a debt limit?

The debt limit was established in 1917 to address concerns over the nation's borrowing in order to pay for World War I. It was also intended to give the Treasury Department greater autonomy in deciding how that borrowed cash could be spent.

In line with many other Western European and North American nations, indebtedness has been a constant throughout America's financial history. In fact, the only year in our entire existence that we've been in the black was 1835, during the extreme small-government reign of President Andrew Jackson).

However, our process is somewhat distinct -- and idiosyncratic --   in that Congress typically approves more spending than it has income to pay for, but doesn't automatically also approve the necessary borrowing.  Because even though Congress sets the budget and the taxes to pay for it, it also sets limits on the amount of debt the nation can have.

Weird, right?

The debt ceiling has been raised more than 100 times since 1917, but until the mid-1970s, it generally didn't spark a huge amount of political controversy.

In the early 1980s, though, federal spending rose significantly, and so did the debt. By 1981, Congress had passed a $1 trillion debt ceiling, (provoking a 16-hour filibuster by Wisconsin Democratic Senator William Proxmire, an outspoken critic of government excess). By the end of the 1980s, the federal debt had risen to $2.8 trillion. Interesting, the Reagan Administration -- certainly no fan of big government --  raised the ceiling a total of 18 times, the most of any president, according to a Guardian analysis. And every president since -- both Democrats and Republicans -- has raised it no less than six times.

(Figures compiled by The Guardian Datablog; sources: BEA, US Treasury, White House)