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What Is the Debt Ceiling and Why Does Congress Need to Raise It?
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© Stefani Reynolds/Bloomberg NewsWASHINGTON—The clock is ticking for Congress to reach a deal to raise the federal borrowing limit, or debt ceiling, before the government runs out of money to pay its bills sometime over the next month or so.
The ceiling was suspended in 2019 and was reinstated automatically at the beginning of August. Top Republicans have said they won’t help Democrats raise the limit this year, leading to a showdown in Congress that could rattle markets if it isn’t addressed soon.
Here’s a guide to what that means, and how the issue may be resolved:
Congress limits how much money the government can borrow, and once the limit is reached, lawmakers must raise or suspend the ceiling before the Treasury Department can issue more debt.
No, a vote to raise the debt limit doesn’t authorize new spending, but it essentially allows the Treasury to raise money to pay for expenses the government has already authorized. About one-third of federal spending is discretionary, which Congress approves through annual appropriations bills. The rest is automatic spending on programs such as Medicare, Medicaid and Social Security.
Although Democrats are aiming to raise revenues to pay for their economic agenda over the next decade, their plans would still add to deficits in the first few years as new spending programs ramp up before tax increases fully kick in. Those near-term shortfalls could require a bigger debt limit increase than would otherwise be necessary to cover new spending over the next several years. Democrats have proposed suspending the borrowing limit through December 2022, rather than a specific number.
If the government can’t borrow to pay bills that come due, it would have to suspend certain pension payments, withhold or cut the pay of soldiers and federal workers, or delay interest payments, 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 one estimate from Goldman Sachs.
In 2011, Standard & Poor’s stripped the U.S. of its triple-A credit rating for the first time after the Treasury came within days of being unable to pay certain benefits. Business groups, current and former Treasury officials and Wall Street firms have raised alarms in recent weeks over the prospect of a government default, which they say would be disastrous for financial markets and the U.S. economy.
These terms refer to two separate issues, but both affect the ability of the federal government to function. While hitting the debt ceiling stops the government from issuing new debt to pay its bills, and could ultimately lead to default, a partial government shutdown occurs when Congress hasn’t appropriated new funds to pay for keeping the government fully open, typically leading to temporary furloughs for some government workers until a new spending bill is passed. In past shutdowns, the government has continued to make its regular payments to debt holders, retirees and others, leaving the impact primarily concentrated on federal workers and contractors.
Ahead of the expiration of the government’s current funding on Oct. 1, Democratic leaders decided to combine both the debt ceiling and a short-term spending bill in the same piece of legislation. Republicans are expected to block that legislation. Democratic leaders haven’t said what they will do next, but House Speaker Nancy Pelosi (D., Calif.) said there will be no partial government shutdown. One possibility is to propose the short-term spending bill on its own, which would likely pass both chambers.
Video: What is the debt ceiling and why is Congress arguing over it again? (The Washington Post)
Congress voted in July 2019 to suspend the debt limit until July 31, 2021, after which the prior limit of $22 trillion would be reset to include any new borrowing in the intervening years.
On Aug. 1, the limit was reinstated around $28.5 trillion, the current level of total U.S. debt, a figure that includes debt held by the public and by government agencies. (Read a separate graphical explainer on the rising debt ceiling.) Since then, the Treasury has been unable to tap bond markets to raise new cash.
The Treasury has been using emergency measures to conserve cash so the government can keep paying its obligations to bondholders, Social Security recipients, veterans and others. The measures to raise cash since Aug. 1 have included redeeming certain investments in federal pension programs and suspending new investments in those programs.
Once those measures run out, the agency could begin to miss payments on the government’s obligations, which could trigger a default on U.S. debt.
Treasury Secretary Janet Yellen notified Congress this month that the Treasury may be unable to keep paying all of the government’s bills on time during the month of October.
Analysts at the Bipartisan Policy Center, a Washington think tank, estimate the Treasury has already exhausted most of those measures and could run out of cash sometime between mid-October and mid-November. The Congressional Budget Office in July said the so-called X date could fall in October or November.
The pandemic has made those estimates much less certain and less precise than in the past. The huge amounts of spending Congress has authorized to cushion 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.
Yes, in theory Democrats could lift the debt limit with no Republican votes. They could decide to revise their current budget resolution either to increase the debt limit as a stand-alone bill or fold it into the $3.5 trillion budget package they are currently writing. That would allow them to move a bill through the 50-50 Senate with just a simple majority, rather than the 60 required of most legislation. However, it would be a complicated and potentially very time-consuming process, and it isn’t entirely clear it could be completed in time.
The new instructions for the fiscal year 2022 budget resolution, which has already been approved in both chambers, would have to move through the House as well as the evenly-divided Senate Budget Committee, where Republicans could block it by not showing up and denying the panel a quorum. But provided that Republicans show up and the bill gets a tie vote in the Budget Committee, a simple majority of the full Senate could 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 and a typically-long marathon of amendment votes known as “vote-a-rama” on the new revised budget resolution. Lawmakers would then write the new legislation increasing the debt limit to a specific figure, and that bill would go through the same process.
Democrats say that raising the debt ceiling is a joint responsibility and that putting the burden on only one party politicizes a task that is part of the basic functioning of government. Democrats also say that the debt has increased 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 that require most legislation to secure a supermajority of 60 votes.
In addition, the party faces challenges in passing President Biden’s $3.5 trillion package of spending on healthcare, child care, education and climate change, and it would prefer to keep separate the question of increasing debt.
Voting to increase the debt limit has become politically difficult for lawmakers, both Democrats and Republicans, because it is often seen as a vote for more spending that could be used in campaign ads against them. Republicans in recent years have used the debt limit vote as a pressure point to try to force spending cuts in programs they oppose. The 2011 showdown led to a bipartisan agreement to impose federal spending caps 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 lift the ceiling with relatively little drama, as part of a broader agreement between then-Treasury Secretary Steven Mnuchin and Mrs. Pelosi.
Write to Kate Davidson at kate.davidson@wsj.com and Kristina Peterson at kristina.peterson@wsj.com
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