Ask Stacy: What Does the Debt Ceiling Deal Do to My Money?

Photo (cc) by Alan Cleaver

Now that the White House and Congress have struck a tentative deal on raising the debt ceiling, what will it mean to you?

The deal isn’t set in stone yet, but let’s take a look at the broad strokes from Whitehouse.gov’s fact sheet

Mechanics of the debt deal
  • The president gets permission to increase the debt limit by $900 billion immediately.
  • Government agency budgets – both defense and non-defense – will also immediately be capped, theoretically resulting in $1 trillion in deficit reduction over the next 10 years and offsetting the immediate $900 billion raise in the debt ceiling.
  • A bipartisan committee will be formed to find an additional $1.2 to $1.5 trillion in spending cuts, which would automatically raise the debt ceiling by an identical amount, unless two-thirds of either the House or Senate disapproves. According the White House, the committee will consider any way possible to reduce the deficit, from closing tax loopholes to Medicare adjustments. The committee is required to make recommendations to Congress before Thanksgiving, and Congress will be required to vote on them before Christmas.
  • Should the committee fail to come up with at least $1.2 trillion in deficit reductions for the 10 years beginning in 2013, automatic spending cuts will be triggered to make up the shortfall. Cuts will be half defense, half non-defense, and could affect Medicare but won’t affect Social Security, Medicaid, and other low-income programs like food stamps.

Both sides are unhappy with the deal: Conservatives wanted more cuts and a balanced-budget amendment. Liberals wanted to close tax loopholes and raise taxes for the wealthiest Americans.

What does it mean?

The bottom line is simple: Uncle Sam is about to spend less money. Since our national debt is taking an ever-increasing share of our economy – the government is borrowing 40 cents of every dollar it spends – this may seem like a good thing. The problem? Jobs.

Before the debt ceiling debate began crowding out everything else, the focus in Washington was on the nation’s anemic economic recovery and 9.2 percent unemployment rate.

Cutting government spending will help reduce our nation’s deficit, but it certainly won’t help the economy. Just last Friday, the government announced that our national economy only grew by an expected 1.3 percent – not enough to create many jobs. More alarming, they also revised first-quarter growth downward from 1.9 percent to only 0.4 percent.

While it’s tempting to compare government spending and debt with that of a business or a family – something TV pundits have been doing nonstop since the debt ceiling debate began – it’s important to realize how the government is different. Unlike a business, our government’s mandate isn’t to create a profit. Government’s function is to serve its citizens. Sometimes that means using borrowed money to stimulate the economy and create jobs or fight wars that weren’t budgeted for.

So it boils down to this: Reducing debt is good. Stimulating a weak economy and helping people who need it is also good. If cuts in government spending reduce our ballooning debt without further damaging our weak economy, we win. If not, we lose.

For the millions of Americans looking for work, trying to recoup a scrambled retirement nest egg, or praying that their home will one day be worth what they paid for it, the stakes couldn’t be higher.

Got more money questions? Browse lots more Ask Stacy answers here.

Disclosure: The information you read here is always objective. However, we sometimes receive compensation when you click links within our stories.

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