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The Debt Ceiling and Its Impact on Small Business

by Guest Author on August 3, 2011

 

No matter which television news network you watch, you’ll be certain to hear heated discussions about the nation’s debt ceiling. Though there has been some agreement, the latest proposed bill must still weave its way through Congress. While politicians, journalists, financial experts and government pundits are all weighing in on the discussion, it gets a little foggy when you try to decipher just what’s going on.  Here are some basics to help get you back to center:
What is the Debt Ceiling?

Also known as the United States Public Debt, the “debt ceiling” is the limit of borrowing, or debt, permitted by the federal government. In 1917 Congress gave permission for most types of borrowing as long as costs were kept below the approved limit.  But over time, our nation’s debt ceiling has steadily grown, with some politicians believing that our country’s amount of debt has spiraled out of control.

The U.S. government’s current limit is $14.3 trillion. Although the debt ceiling has been raised more than 100 times since its creation, experts say that the wars in Iraq and Afghanistan, recent tax cuts, decreases in tax revenue and the global economic recession have all played major roles in the debt ceiling’s escalation.

The Current Tête à Tête

The topical clash between Republicans and Democrats is over conflicting debt-cutting philosophies. Republicans are demanding slashes in spending, especially to government-funded programs, while Democrats want to see higher taxes imposed on the wealthy and corporations.

Some policy experts claim that Congress now has so much flexibility when it comes to spending that there is no longer a need to formally raise the debt ceiling, but others counter that this limit helps to keep tighter control over the nation’s budgeting process and keeps unnecessary spending in check.
What Happens if Spending Exceeds the Debt Ceiling?

If the nation’s debt goes above the permitted ceiling established by Congress, the U.S. may wind up in default on its financial obligations and impact international capital markets; possibly causing a worldwide economic calamity. Government-funded programs would go unpaid. Social Security payments and paychecks to military service personnel could lapse.

Since the U.S. is so enmeshed with the economies of many other nations, if the government stopped paying interest on its debt the result could potentially be national and global economic catastrophe. Since most all forms of debt – credit card, home loans, business loans, car loans and school loans are all tied to Treasury securities, failure to make good on our debt would cause a financial crisis of epic proportions.

How Does the Debt Ceiling Impact Small Business?

Businesses, small and large alike could be negatively affected if Congress fails to agree on raising the debt ceiling. One of the biggest issues for companies will be interest rates; if they go up as a result of the debt-ceiling crisis, this will surely wreak havoc on businesses that may already be struggling through several years of a fragile economy.

With all of the talk about federal financial woes, small businesses are also worried that consumers will cut back on spending. Some companies are reporting that all of the debt ceiling talks has created consumer panic and that talk of the nation going into financial default has already begun to impact business.  To make matters worse, if interest rates go up and spending goes down, the final result will be that jobs will be lost and businesses will close. The end results could be higher unemployment and greater financial uncertainty for the nation.

While there is currently discussion between Republicans and Democrats that no tax hikes will be implemented, at some point down the line, tax increases may very well become a reality for small businesses. On the plus side, cost-cutting measures may include a greater number of government contracts available to small businesses. Many branches of the government are currently outsourcing jobs to small businesses – a move that may help to counter some financial worries.

 

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