I watched President Obama’s speech this last week, and I didn’t understand something. He said he’s cut the deficit by 2/3. Yet, we need the debt ceiling raised in order to avoid a government shutdown. Why? If I were to pay down 2/3’s of my debt, I would have a larger amount of credit available to me. What am I missing?
You are missing a key difference between the federal budget deficit and the public debt level. The deficit shows by how much the federal government expenditures exceeded its revenues in a given fiscal year; the deficit is measured per year. In contrast, the debt level refers to the total amount that the government owes on a particular date, say, the last day of a fiscal year. Essentially, the debt level today is an accumulated sum of all past budget deficits minus surpluses since the country’s founding.
Thus, cutting the deficit by 2/3rds does NOT imply that the federal government has paid off 2/3rds of its outstanding debt. It simply means that the debt is now growing at a slower rate, but would still hit an established debt ceiling eventually.
To be precise, hitting the debt ceiling would not cause a government shutdown, such as the one in October 2013. However, it could create a chaotic situation since the U.S. Treasury may not be able to pay bills in full and on time. If you are interested, please see the following popular press article on the debt ceiling: “CNN.Money: 7 things you need to know about the debt ceiling (yes, that again).”