The ceiling was suspended in 2019 and was automatically reinstated in early August. Leading Republicans have said they won’t help Democrats increase the limit this year, leading to a showdown in Congress that could shake the markets if not dealt with quickly.
Here is a guide explaining what it means and how the issue can be fixed:
What is the debt ceiling?
Congress limits how much the government can borrow, and once the limit is reached, lawmakers must raise or suspend the cap before the Treasury Department can issue more debt.
Does raising the debt ceiling allow new spending?
No, a vote to raise the debt ceiling doesn’t authorize new spending, but it essentially allows the treasury to raise funds to pay for spending the government has already authorized. About a third of federal spending is discretionary, which Congress approves through annual appropriation bills. The rest is automatic spending on programs like Medicare, Medicaid, and Social Security.
Although Democrats aim to increase incomes to pay for their economic agenda over the next decade, their plans would increase deficits further in the early years, as new spending programs ramp up before tax increases. come into full force. These short-term deficits may require a larger debt limit increase than would otherwise be necessary to cover new spending over the next several years. Democrats have proposed to suspend the borrowing limit until December 2022, rather than a specific number.
What would happen if the debt ceiling was not raised?
If the government cannot borrow to pay the overdue bills, it would have to suspend some pension payments, withhold or reduce the wages of soldiers and federal workers, or delay the payment of interest, which would constitute default. Unless Congress raises the debt ceiling, the Treasury could be forced to cut payments by more than 40%, including to some U.S. households, according to a Goldman Sachs estimate.
In 2011, Standard & Poor’s first withdrawn its AAA credit rating in the United States after the Treasury was unable to pay certain benefits a few days later. Business groups, current and former Treasury officials, and Wall Street companies have sounded the alarm in recent weeks over the prospect of a government default, which they say would be disastrous for financial markets and l American economy.
Why is this debt limit struggle taking place now?
Congress voted in July 2019 to suspend the debt limit until July 31, 2021, after which the previous limit of $ 22 trillion would be reset to include any new borrowing in intervening years. On August 1, the limit was reset to about $ 28.5 trillion, a figure that includes debt held by the public and debt held by government agencies. Since then, the Treasury has not been able to tap the bond markets to raise new liquidity.
The Treasury used emergency measures to conserve cash so the government could continue to pay its obligations to bondholders, Social Security recipients, veterans and others. Steps taken to raise funds since August 1 include buying back some investments in federal pension programs and suspending new investments in those programs.
Once these measures are exhausted, the agency could start to miss payments on government bonds, which could trigger a default on US debt.
How long do legislators have to act?
Treasury Secretary Janet Yellen informed Congress this month that the Treasury may not be able to continue paying all government bills on time during the month of October.
Analysts at the Bipartisan Policy Center, a Washington think tank, believe the Treasury has already used up most of these measures and could run out of liquidity between mid-October and mid-November. The Congressional Budget Office said in July that the so-called X date could fall in October or November.
The pandemic has made these estimates much less certain and less precise than in the past. The huge spending that Congress has authorized to protect the economy from the impact of the coronavirus pandemic, and the unpredictable nature of the recovery, have made it difficult to estimate how much cash is flowing in and out of the treasury each day.
Could Democrats lift the debt ceiling themselves?
Yes, in theory, Democrats could lift the debt limit without Republican votes. They could decide to revise their current budget resolution either to raise the debt limit as a stand-alone bill or to incorporate it into the $ 3.5 trillion budget package they are currently drafting. This would allow them to pass a bill in the Senate 50-50 with a simple simple majority, rather than the 60 required by most laws. However, it would be a complicated and potentially very lengthy process, and it is not entirely clear that it could be completed on time.
New instructions for the FY2022 budget resolution, which has already been approved in both chambers, are expected to pass through the House as well as the equally divided Senate Budget Committee, where Republicans could block it by not showing up. and denying the panel a quorum. But provided the Republicans show up and the bill gets a tie vote in the budget committee, a simple majority of the entire Senate could vote to get him to speak, the vice president Kamala Harris providing the deciding vote.
The Senate would then have to hold a debate and a typically long marathon of amendment votes known as “vote-a-rama” on the new revised budget resolution. Lawmakers would then draft new legislation raising the debt limit to a specific number, and this bill would go through the same process.
Why don’t the Democrats want to act unilaterally to raise the debt ceiling?
Democrats say raising the debt ceiling is a shared responsibility and putting the burden on one party politicizes a task that is part of the basic workings of government. Democrats also say the debt has risen in part because of 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 hampered by Senate rules which require most laws to obtain a qualified majority of 60 votes.
In addition, the party faces challenges in adopting President Biden’s $ 3.5 trillion spending package for health care, child care, education and climate change, and it would prefer to keep the issue of increasing separate debt.
Is it still a big partisan fight?
Voting to increase the debt limit has become politically difficult for lawmakers, Democrats and Republicans, as it is often seen as a vote for more spending that could be used in campaign ads against them. In recent years, Republicans have used the debt limit vote as a pressure point to try to force spending cuts on programs they oppose. The 2011 showdown led to a bipartisan deal to impose limits on federal spending over the next decade, but Democrats have since resisted GOP efforts to tie the debt limit to budget or policy changes.
In 2019, Congress voted to raise the cap with relatively little drama, as part of a larger deal between then-Treasury Secretary Steven Mnuchin and House Speaker Nancy Pelosi (D ., California).
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