WASHINGTON – Like many bad things in life, the current standoff over money to keep federal programs running has proved easier to stumble into than to get out of. Now the stalemate is about to get more complex. The reason: Congress has a second deadline to deal with. This one involves the federal debt limit.
Here’s what you need to know:
Q: What is the debt ceiling?
A: The U.S. has had a debt every year of the country’s history except 1835. In World War I, Congress passed a law to limit how much debt the government could have. That limit has been raised many times since and stands at $16.7 trillion.
Q: Why does the limit need to be raised?
A: The government spends more than it raises in taxes and other revenue; that gap is the annual budget deficit, and the government borrows money to cover it. The government has run a deficit in all but four years since 1970. The annual deficit has shrunk a lot recently, but it’s still sizable. Whenever the government has to borrow, the debt grows. The debt hit the current limit in May. Since then, the government has used accounting measures to conserve cash, but the extension those techniques provided will only last a little while longer.
Q: What’s the deadline?
A: Treasury Secretary Jacob J. Lew has told Congress that the current “extraordinary measures” will provide enough cash only until Oct. 17. After that, Lew said Tuesday in a letter, “it would be impossible for the United States of America to meet all of its obligations for the first time in our history.”
Q: Would the government be unable to pay bills immediately?
A: Probably not, but the risk would be real. The government would still have income from tax revenues, about $30 billion each day. Over time, however, that income would cover only about two-thirds of the bills that come due.
The government’s bills are not spread evenly throughout the month: Some days’ needs are much bigger than others. The uneven nature of expenses makes it hard to know for sure on which day the crunch would hit. A nonpartisan outside group, the Bipartisan Policy Center, estimates that the date for nonpayment of some bills would fall between Oct. 18 and Nov. 5.
Q: What happens if the government couldn’t pay all its bills?
A: No one really knows because Congress has never refused to raise the debt ceiling. But economists, business leaders and others warn that any hint of a U.S. default on its obligations could severely rattle financial markets, cause interest rates to rise and, perhaps, trigger another financial crisis. The Treasury Department warned of “catastrophic economic consequences” if the debt ceiling were not raised on time.
Q: Given the risks, why is raising the debt ceiling difficult?
A: Some members of Congress disapprove of debt on principle and therefore always vote against increasing the limit. Others know that a vote for “more debt” makes an easy 30-second negative campaign ad even though the increase is needed to pay bills the government has already incurred. Still others want to use the occasion to push for concessions on other issues.
Q: What happened the last time this came up?
A: In July 2011, Congress deadlocked over the debt. Amid dire warnings that a first-ever default by the U.S. government could plunge the economy back into recession, they reached a last-minute deal.
That agreement included across-the-board spending cuts and a procedure under which Congress allowed President Barack Obama to raise the debt ceiling on his own. Each chamber could then vote to reject the debt increase, but unless both houses overrode a presidential veto, the increase would stick. That way, members of Congress could go on record as having opposed the debt.
When that deal expired, Congress this spring passed a new measure that simply suspended the debt ceiling for a while so that members would not have to vote to increase it.