April 13, 2011

Before raising the debt ceiling, fix the underlying problems

With a budget deal safely agreed upon, concerns have turned to the debt ceiling.  Economist Veronique de Rugy says that contrary to some fears, failing to raise the debt ceiling does not mean that America will automatically default, and before Congress decides to raise the cap, it needs to look at what financial reforms the country is willing to make.

“It just isn’t true that the government will automatically default if the debt ceiling isn’t raised or that the government will immediately shut down if the debt ceiling is reached,” said de Rugy.  “There are many options for keeping the government running past that point — at least for a while, if Congress doesn’t change its spending habits, and longer if it does.”

De Rugy acknowledges that not raising the debt ceiling might impact our interest rates, but says that raising the debt ceiling, and failing to seriously address entitlement spending and spending in general, would also raise concerns.

“Our debt will only magnify with the explosion of entitlement spending that is set to hit in the next decade,” said de Rugy.  “If we don’t start taking steps to deal with this, there’s little reason for investors to trust the federal government’s long-term ability to pay back its debt.”