what is the difference between the fiscal cliff and debt ceiling?

Posted on 2013-01-21
Last Modified: 2013-02-01
Hi Everyone,

             With so much talk as of late regarding the topics of fiscal cliff and debt ceiling, I am wondering what the difference or differences are between these two concepts being thrown around the political arena.  To me, it seems like two separate words describing the same thing.  For instance, I understand the government has a huge deficit.  While I am not sure if this statistic is accurate or up to date, but, I have heard $1.5 trillion dollars.  With $1.5 trillion dollars in debt, I believe the government has been frantically trying to resolve this situation before going into default  by the end of the fiscal year.  In other words, I believe the government has a "set" amount or debt ceiling which it can go up to before defaulting on its own debt.  And, if it exceeds that amount by the end of the fiscal year, then, it results in what is termed a fiscal cliff.  But, what about debt ceiling?  Does it not describe the same scenario or are fiscal cliff and debt ceiling actually two different things operating here?

               Any shared thoughts or opinions to this question will be greatly appreciated.  I look forward to hearing back from everyone.

                Thank you

Question by:GMartin
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Assisted Solution

by:Dave Baldwin
Dave Baldwin earned 15 total points
ID: 38802387
The fiscal cliff and debt ceiling are two different things.  The 'fiscal cliff' referred to changes in income tax and some other things that directly affect consumers and citizens.  The 'debt ceiling' refers to the limit on the ability of the government to borrow money.

Author Comment

ID: 38802509

             Thank you so much for your quick reply.  Sticking to your explanation of the fiscal cliff, could the recent increase in Social Security taxes be considered an example of a solution used to circumvent it?  Also, what was the actual percent increase of Social Security taxes?  I have heard it went from being 4% to an increase of 6%.

             With respect to your explanation of the debt ceiling, could it be compared to the limit a consumer might have on a Visa or MasterCard credit card?  For instance, lets say a consumer is allowed a credit up to $5000 on a credit card.  Since its ceiling is set at $5000, the consumer can not exceed that amount.  I am speculating the federal government operates off of a similiar principle of economics.  

LVL 82

Assisted Solution

by:Dave Baldwin
Dave Baldwin earned 15 total points
ID: 38802601
In 'political speak', it was not an increase but the expiration of a tax break that is causing your Social Security payments to increase.  That's one of the tax breaks that they did not renew.

Your description of the 'debt ceiling' is fairly accurate except for being a lot of zero's short.
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Accepted Solution

tliotta earned 35 total points
ID: 38803630
The 'debt limit' refers to the total amount of outstanding debt. This amount involves borrowing that has been done since at least WW II. Each year that there is a budget deficit, more money needs to be borrowed. There is a limit set by law for how much total accumulated debt is allowed. Whenever the amount that needs to be borrowed in a budget year would cause the total accumulated amount to exceed the legal limit, Congress must set a new higher legal limit, i.e., "raise" the debt ceiling.

The 'fiscal cliff' refers to everything that would happen if the debt limit isn't raised or if the combination of factors that lead to increased debt aren't resolved. First, by not raising the limit, whatever work that the money would be used for won't get done. It might be spending for defense or for paying interest on old debt or for paying salaries for federal government workers or for anything the federal government spends money on.

But it's a little more complicated because of laws passed by Congress a couple years ago. There are a few actions that will happen automatically if ongoing deficits in budget years are not corrected. Immediate spending cuts would be forced in many areas, resulting in ending payments for contracts, likely layoffs of government employees, possible ending of contributions to pension funds and other spending. The huge immediate reductions in the movement of money would have resulting major effects on everyone and every business that relies on receiving the spending.

It is the sudden mandatory cuts that get described as a "cliff".

Congress passes appropriation bills every year to authorize spending money for that year. Later, a time arrives when the appropriated money is actually 'spent'. Some kind of work is done by someone, authorized by an appropriation. The work is done in expectation of being paid. When the "cliff" moment arrives, many people who expect to be paid will find that payment won't happen.

During all of USA history, everyone who has done valid work for the USA federal government has been paid. Confidence has been high. If that suddenly changes, if expected payments can no longer be relied upon, anyone dealing with the USA federal government in the future is going to demand higher rates to cover the higher uncertainty of being paid. Borrowed money will deand higher interest. Contracts will have higher bottom lines. Everything will be more expensive making the problem even greater than it is.

It's possible that the long term effects will be better, but the short term could be dramatic and a lot of trouble. It's compared to "falling over a cliff".

'Debt limit' and 'fiscal cliff' are closely related, but they are different things.


Author Comment

ID: 38845281
Hi Everyone,

             I greatly appreciate the attention and detail given in the replies to this question.  After reading each response, I was able to learn a great deal more about the differences between fiscal cliff and debt ceiling in additing to correcting a few of my own misconceptions as they relate to these concepts.  

             Great job!!!


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