What is the debt limit and why does Congress need to raise it?

Treasury Secretary Janet Yellen told Congress on Tuesday that the Treasury would be unable to pay all of the government’s bills if the ceiling was not raised by October 18.

“At that point, we expect the Treasury to be left with very limited resources that will quickly run out. It is uncertain whether we will be able to continue to meet all of the country’s commitments beyond that date.”

The ceiling was suspended in 2019 and was automatically restored in early August. Top Republicans have said they won’t help Democrats raise the limit this year, triggering a showdown in Congress that is raging short-term currency markets.

Here’s a guide to what this means, and how the problem can be resolved:

What is the loan limit?

Congress limits how much money the government can borrow, and once the limit is reached, lawmakers must raise or suspend the limit before the Treasury Department can issue more debt.

Does raising the loan limit allow fresh expenditure?

No, a vote to raise the debt limit does not authorize new spending, but it essentially allows the Treasury to raise money to pay for expenses the government has already authorized. About a third of federal spending is discretionary, which Congress approves through annual appropriations bills. The rest is automatic spending on programs like Medicare, Medicaid and Social Security.

Although Democrats are aiming to increase revenue over the next decade to pay for their economic agenda, their plans will still add to the deficit in the first few years as new spending programs are fully rolled out before tax increases. Those near-term shortfalls may necessitate a higher credit-limit increase than would otherwise be necessary to cover new expenses over the next several years. Democrats have proposed suspending borrowing limits until December 2022, rather than a specific number.

What if the loan limit is not increased?

If the government cannot borrow to pay the outstanding bills, it will have to suspend some pension payments, cut or cut the pay of soldiers and Confederate employees, or delay interest payments, which will default. . Unless Congress raises the debt limit, the Treasury could be forced to cut payments by more than 40%, including for some American households, according to an estimate by Goldman Sachs.

In 2011, Standard & Poor’s stripped America of its triple-A credit rating for the first time after Treasury arrived within days of being unable to pay some benefits. Trade groups, current and former Treasury officials and Wall Street firms have raised alarm in recent weeks over the prospect of a government default, which they say would be disastrous for financial markets and the US economy.

How does the debt limit relate to a possible government shutdown?

These terms refer to two different issues, but both affect the ability of the federal government to function. Exceeding the debt limit prevents the government from issuing new debt to pay its bills, and may eventually result in default, a partial government shutdown that occurs when Congress refuses to keep the government completely open. The new money is not appropriated to pay for holidays, usually temporarily leading to some government employees until a new spending bill is passed. In past shutdowns, the government has continued to make its regular payments to debtors, retirees and others, with the impact primarily focused on federal workers and contractors.

Senate Republicans blocked a Democratic bill on Monday that would raise both the government’s funding and borrowing limits before it runs out of money, raising a political showing over government finances.

Senate Democrats sought to pass a House-approved stopgap measure that funds the government until December 3, 2021, and suspends debt limits until December 16, 2022. They are racing to send legislation to President Biden’s desk before the government’s current funding. Expires on October 1st at 12:01 pm.

Why is this debt limit fight happening now?

Congress voted in July 2019 to suspend the debt limit until July 31, 2021, after which the earlier limit of $22 trillion would be reset to include any new borrowing in the intervening years.

On August 1, the limit was reinstated to around $28.5 trillion, the current level of total US debt, a figure that includes debt held by the public and government agencies. (Read a separate graphical explainer on rising debt limits.) Since then, the Treasury has been unable to tap the bond markets to raise new cash.

The Treasury is using emergency measures to conserve cash so the government can pay off its obligations to bondholders, Social Security recipients, veterans and others. Cash-raising measures starting August 1 include cashing in on some investments in federal pension programs and suspending new investments in those programs.

Ms Yellen has warned lawmakers for months that the government could end those measures this fall, and said earlier this month that the date could come as early as October. Tuesday’s letter is the first time it has provided a specific estimate for the so-called X-date.

Once those measures expire, the agency could begin to miss payments on government obligations, which could trigger a default on the US debt.

Can Democrats lift debt limits on their own?

Yes, in theory Democrats could lift the debt limit without a Republican vote. They may decide to revise their current budget proposal to either raise the debt limit as a stand-alone bill or add it to the $3.5 trillion budget package they are currently writing. This would allow them to move a bill through the 50-50 Senate with only a simple majority, rather than requiring a majority of the 60 laws. However, this would be a complex and potentially very time-consuming process, and it is not entirely clear whether it can be completed in a timely manner.

The new directives for the fiscal year 2022 budget proposal, which have already been approved in both houses, will have to move through the House as well as an equally divided Senate Budget Committee, where Republicans refrain from showing and denying it. can. Panel a quorum. But provided that Republicans appear and the bill receives a tie vote on the budget committee, a simple majority of the full Senate can vote to bring it to the floor, with Vice President Kamala Harris providing the tiebreaking vote.

The Senate would then have to hold a debate on the newly revised budget proposal and a long marathon of amendment votes known as the “Vote-a-Rama”. Then lawmakers would write a new law raising the debt limit to a specific figure, and that bill would go through the same process.

Why don’t Democrats want to take unilateral action to raise the debt limit?

Democrats say raising the debt ceiling is a joint responsibility and that burdening only one party politicizes an act that is part of the basic workings of government. Democrats also say the increase in debt is due to policies advanced under Republican presidents, including tax cuts under former President George W. Bush and former President Donald Trump. In the 50–50 Senate, Democrats are also constrained by Senate rules that require most legislation to secure a majority of 60 votes.

In addition, the party faces challenges in passing President Biden’s $3.5 trillion package on health care, childcare, education and climate change, and would prefer to set aside the question of mounting debt.

Is it always one big partisan fight?

Voting to raise the debt limit has become politically difficult for both Democrats and Republicans, as it is often seen as a vote for more spending that can be used in campaign ads against them. Republicans have used the debt limit vote in recent years as a pressure point to try to cut spending in programs they oppose. The 2011 performance led to a bipartisan agreement to impose federal spending caps over the next decade, but Democrats have since resisted GOP efforts to tie debt limits to budget or policy changes.

In 2019, Congress voted to raise the ceiling with relatively little drama, as part of a broader agreement between then-Treasury Secretary Steven Mnuchin and House Speaker Nancy Pelosi (D., Calif.).