Making Sense of the Debt Ceiling

Everything You Need to Know About the Debt Ceiling

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By No Labels

Making Sense of the Debt Ceiling

As negotiation over a budget deal heats up in the next three weeks, with Congress speeding toward a Jan. 19 deadline to pass a spending bill, talk may increase about raising the debt ceiling.

The debt ceiling is a federal government borrowing limit that Congress must address periodically or risk catastrophic damage to the U.S. economy and financial markets. If Congress fails to increase the limit and the U.S. were to default on its debt, interest rates could spike and increase the cost of everything from mortgage loans to consumer credit.

The debt ceiling is easily misunderstood and often mischaracterized. As the debate continues, here’s what you need to know.

What exactly is the debt ceiling?

Congress is required to authorize all government debt. The debt ceiling is Washington jargon for the limit on that borrowing. When Congress raises the debt ceiling, it is authorizing the Treasury Department to borrow more money. The current debt limit is more than $20 trillion.

The authorization applies only to spending that has already been decided through the budget and appropriations process, expenses such as Social Security and Medicare payments, tax refunds, military salaries and more. It does not authorize new spending.

However, the authorization is still extremely important. Without it, the U.S. could ultimately default on its obligations, risking major trauma to financial markets. When Congress debates an increase to the debt ceiling, it is debating whether the government should pay its bills. However, because it is generally considered must-pass legislation, lawmakers sometimes use the debt ceiling as leverage to get other bills passed.

Congress has voted at least 78 times since 1960 to “permanently raise, temporarily extend, or revise the definition of the debt limit,” according to the Treasury Department.

What are ‘extraordinary measures?’

When the government hits its borrowing limit, spending often continues, even if Congress has not raised the debt ceiling. When that happens, the Treasury Department uses “extraordinary measures.” This means borrowing money from certain accounts, such as employee retirement funds, to pay the government’s bills. When the ceiling is raised, the agency pays back the funds with interest. The agency can do this for several months, but exactly how long is a matter of some disagreement.

What happens if the U.S. defaults?

Nobody really knows because it has never happened. But the Treasury Department is not shy with its predictions. “Failing to increase the debt limit would have catastrophic economic consequences,” the agency says on its website. “It would cause the government to default on its legal obligations – an unprecedented event in American history. That would precipitate another financial crisis and threaten the jobs and savings of everyday Americans – putting the United States right back in a deep economic hole.”

A debt ceiling debate a few years ago caused jitters, as The Washington Post reported. “Just getting close to the debt-ceiling deadline in 2011 rattled the financial markets and consumers, who feared that home mortgage and credit card interest rates would soar and that government payments, like Social Security checks, might be delayed. S&P even downgraded its rating on sovereign U.S. debt.”

What’s this talk about abolishing the debt ceiling process?

The debt ceiling was created 100 years ago to prevent Congress from having to authorize every borrowing transaction and there are those who say it no longer serves a useful purpose. The argument is that there is no reason for Congress to repeatedly raise the debt ceiling when it has already limited spending (and therefore borrowing) through the budget process. President Trump and Minority Leader Chuck Schumer discussed eliminating the debt ceiling process earlier this year and expressed support for such an initiative. But the idea has opposition, and it is unclear whether Congress will ever act on it.

What’s the state of play?

Raising the debt ceiling is one of the things on the Congressional to-do list for the beginning of this year. While there is some debate over how long Treasury can last using extraordinary measures, most estimates say that the agency can go until March before Congressional action is required.

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