The debt ceiling: What you need to know
Looking for an explanation of what the debt ceiling is and why it matters? Here’s a primer for beginners, intermediates and experts. Read the full story here.
The U.S. government spends trillions of dollars (that’s nine zeros) a year on helping senior citizens, running national parks, protecting the country and many other things. So, the government has lots and lots of bills to pay.
The government earns money by collecting taxes, but sometimes the amount it earns through taxes isn’t enough to pay all these bills. So, it has to borrow money.
The government borrows money from individual Americans, foreign countries, retirement funds and others. Congress decides how much money the government is allowed to borrow.
On Thursday, the government is not going to be able to borrow any more money because Congress hasn’t voted to let it. The limit on borrowing is called the debt limit or debt ceiling.
But even if the government can’t borrow money, it still has to pay its bills. So it just has to use any money it can scrounge from its couch cushions -- as well as any tax receipts that come in the door each day. The problem is: That’s not enough to pay all the bills.
This is why if Congress doesn’t raise the debt ceiling, the government will have to cut a huge amount of spending, including possibly paying back money it owes.
When the federal government spends more than it takes in taxes — which it usually does — then the U.S. Treasury has to borrow the rest to pay all its bills. But Congress has always imposed a legal limit on how much money the Treasury can actually borrow from outsiders and other government accounts. That's the "debt ceiling,” also known as the debt limit or borrowing limit.
The current debt limit is at $16.7 trillion. The Treasury Department can borrow that much and not a penny more, unless Congress votes to raise the ceiling.
It’s estimated that by Oct. 17, the government will be running low on cash, and it won’t be able to borrow or scrounge up any more money.
But what about the shutdown?
The government shut down because: One of the jobs of Congress is to set a budget, that is, determine how much money it's going to spend on different programs (defense, Social Security, etc.) If Congress can’t agree on how to fund the government, they have to close down until they come up with a plan. Right now, we’re shut down because Congress had no plan for how to fund the government after Sept. 30, 2013. So, the government shut down on Oct. 1. Now, Congress is working on a plan.
Wait, so how does this relate to the debt ceiling?
Congress is trying to negotiate a deal that would do both things at once: decide how the government would be funded, which would end the shutdown, and raise the debt limit.
So when will the government hit the debt ceiling?
Technically, we've already reached the borrowing limit. But the government won't actually run out of money to pay its bills until some time after Oct. 17.
The U.S. government hit its $16.699 trillion borrowing limit back on May 19. Since then, the Treasury Department has taken a slew of “extraordinary measures” — such as tapping exchange-rate funds — to raise an extra $412 billion and ensure the government has enough money to meet all its obligations, like paying bondholders and sending out Social Security checks.
By Oct. 17, however, the Treasury Department will run out of "extraordinary measures." At that point, the government will be running low on cash, and it won't be able to borrow or scrounge up any more money.
"We estimate that, at [Oct. 17], Treasury would have only approximately $30 billion to meet our country's commitments," said Treasury Secretary Jack Lew in a Sept. 25 letter to Congress. "This amount would be far short of net expenditures on certain days, which can be as high as $60 billion."
So what happens on Oct. 17? Is that doomsday?
It's hard to say. At some point after Oct. 17, the federal government will only bring in enough tax revenue to pay about 68 percent of its bills for the coming month, according to an analysis by the Bipartisan Policy Center. (More precisely, the government will bring in roughly $222 billion in taxes and owe roughly $328 billion between Oct. 18 and Nov. 15.) The first missed payment won't necessarily happen right on Oct. 17, but it would likely happen soon thereafter.
What will the impact of a possible default be?
A defense contractor might accept an IOU. A retiree who sees his Social Security check delayed might be less pleased. But the financial markets could be really unforgiving.
Many economists think it would be disastrous if the government ever missed an interest payment on the debt, like the ones due on Oct. 31 and Nov. 15. The global financial markets are structured around the notion that U.S. Treasuries are the safest asset in the world. If that assumption were ever called into question, havoc could ensue.
If we raise the debt ceiling, will we actually be going into more debt?
Yes. The government will be authorized to borrow more money to pay the country’s bills.
Note that the debt ceiling doesn't determine how much the U.S. government is authorized to spend. Congress does that by setting the budget and passing various spending bills (remember, this is why we’re shut down: Congress hasn’t reached an agreement yet on how we’ll fund things).
The debt ceiling only determines whether the U.S. government can borrow enough money to pay for programs that Congress has already enacted, like Medicare reimbursements or military pay.
How catastrophic will reaching the debt limit be? Should I really be worried?
The short answer is yes. While the impact of a potential default might not be felt immediately, its effects would ripple through the global economy.
GRAPHIC: Staff reports - The Washington Post.