(WETM) – Congress has just under three weeks to come up with a plan to raise the debt ceiling, or else the U.S. will run out of money.
The U.S. Treasury is expecting to run out of cash on October 18, the so-called “X-Date”, and if the debt ceiling isn’t suspended or raised by then, the government will default on its loans.
The debt ceiling is a large part of the drama in Congress and is being used as political leverage, but what does it actually mean?
What is the debt ceiling and how does it work?
The most important distinction: raising the debt ceiling does not allow the government to spend more money. Instead, it allows the government to borrow money to pay back debts it has already accumulated.
In other words, it’s a cap on how much the government can borrow, not how much the government can spend.
During the Trump administration, the U.S. added more than $7.5 trillion in debt, and now those bills have come due.
In order to avoid a government shutdown and a default on its loans, the government must raise the debt ceiling in order to borrow money that will be used to pay back all that debt.
Does raising the debt ceiling allow the government to spend more money?
No, it doesn’t.
Increasing the debt limit does not increase the federal budget.
“Raising the debt ceiling doesn’t authorize additional spending of taxpayer dollars,” Treasury Secretary Janet Yellen wrote in a Wall Street Journal op-ed. “Instead, when we raise the debt ceiling, we’re effectively agreeing to raise the country’s credit card balance.”
However, politicians try to use the debt ceiling as political leverage, saying that the ones who want to raise the ceiling just want to spend more money.
In fact, Senator Mitch McConnell has claimed the debt limit needs to be raised because of the proposed $3.5 trillion tax and spending bill and other Democratic priorities.
But that’s backward. Raising the debt limit is needed to make good on past — not future — spending, including the Republicans’ $1.5 trillion, deficit-financed tax overhaul that Trump signed into law in 2017 and additional trillions in coronavirus relief that passed with GOP support.
Essentially, Republicans don’t want to pay what’s due, which is money spent during the previous administration.
Deficit vs. Debt?
The current national debt is around $28.5 trillion. But how did we arrive at that number?
In 2019, Congress passed legislation to suspend the debt limit for another two years. At that time, the limit was roughly $22 trillion. That suspension expired at the end of July 2021, and by then, the U.S. had added another $6.5 trillion, bringing our total debt up to $28.5.
But this number is not the same as our national deficit. The government’s deficit is the difference between what it spends and invests (in things like Social Security, Medicare/Medicaid, and military salaries) and what it raises in taxes.
Debt and Deficit are related. As the United States continues to spend more than it makes, that deficit contributes to the overall national debt.
Why is the government able to borrow more money in order to pay bills that already exist?
On an individual level, a person or a family can’t just borrow more and more money each year to pay their bills that already exist. In other words, you can’t keep paying a credit card bill with another credit card.
However, on a national and global scale, “that’s how the government operates,” said Martin Cantor, a Long Island Consulting Economist. “The days of cash in equals cash out are long gone.”
“Every country operates on debt because in order to have capital expenditures, for infrastructure, you’ve got to borrow the money. There’s no way we can raise a trillion dollars for infrastructure through raising taxes. It’s debt.”
Raising the ceiling vs. suspending?
Raising the debt limit is just what it sounds like. Congress and the Senate vote to raise the number to allow the government to borrow money to pay its bills.
When Congress voted to temporarily suspend the debt limit in 2019, this removed that borrowing cap. So when the suspension expired on August 21, the debt limit was raised to cover the amount of debt added during those two years.
In August, because the government technically hit the debt limit, the Treasury then started “extraordinary measures” to avoid a shutdown. The New York Times says these measures “are essentially fiscal accounting tools that curb certain government investments so that the bills continue to be paid.”
What if we got rid of the debt ceiling?
Some argue that the U.S. should simply get rid of the debt ceiling.
Eliminating the debt ceiling would also eliminate the risk of the government running out of money. That means there would be no risk of the U.S. defaulting on its loans, which, in turn, means there would be no risk of a government shutdown.
That step would allow the spending and taxes approved by Congress and the president to determine how much debt the government issues, instead of a legally binding but otherwise superfluous cap.
What happens if the government defaults?
Treasury Secretary Yellen warned on September 28 that the debt ceiling has to be raised by October 18. That’s the date the Treasury estimates it will run out of money to pay back its loans.
If the ceiling doesn’t get raised, then the U.S. would default on the money it’s borrowed. And if the U.S Federal Government defaults, it would cause worldwide economic disruption.
But Cantor says it’s extremely unlikely that will happen because the risk is too high.
“The yield on the treasury bills would go down, which means that interest rates would have to go up to attract borrowers, it would create absolutely turmoil in the financial markets and the borrowing markets for the United States if we ever defaulted on our debt.”
Basically, the U.S.’ credit score would plummet and it would become much harder to borrow money.
Cantor says to think of a mortgage. If you have a mortgage on your house and you can’t pay it, what happens?
“They foreclose on you. You have to go to your credit card, or you have to get a raise where you’re working in order to pay a mortgage,” Cantor said. “So just think of it as a home mortgage, and that’s really what’s happening.”
The U.S. has never defaulted on its loans in the 100 years the debt ceiling has existed. Normally, both parties want to avoid a default.
During Trump’s administration, Democrats joined the then-Republican Senate majority in voting several times to raise or suspend the ceiling, But now, with Democrats in control of Washington, Republicans are unwilling to return the favor.
The Associated Press contributed to this report.