What you need to know about the U.S. debt limit
Q. What exactly is it?
A. The borrowing limit is a cap on how much debt the government can accumulate to pay its bills. The government borrows in most years because its spending has long exceeded its revenue. The first borrowing limit was enacted in 1917. Since 1962, Congress has raised the borrowing limit 77 times. It now stands at $16.7 trillion.
Q. When will we reach the limit?
A. The national debt actually reached the limit in May. Since then, Treasury Secretary Jacob Lew has made accounting moves to continue financing the government without further borrowing. But Lew says those measures will be exhausted by Thursday. The government will then have to pay its bills from its cash on hand – an estimated $30 billion – and tax revenue.
Q. So what happens after Thursday?
A. The government could pay its bills for a few days. But sometime between Oct. 22 and Oct. 31, the cash on hand and tax revenue wouldn’t be sufficient, according to the Congressional Budget Office. The date isn’t exact because it’s impossible to foresee precisely how much revenue the government will receive and when.
Q. When it runs out of cash, does the government default?
A. No, not right away. A default would occur if the government fails to make a principal or interest payment on any of its Treasurys. The first interest payment after Thursday’s deadline is a $6 billion payment due Oct. 31.
Many experts think that to avoid a default, Treasury would make payments on the debt its top priority. But that is the subject of intense dispute in Washington. The House has approved a bill to require such “prioritization.” The Senate hasn’t passed it, though. And President Barack Obama has threatened to veto it.
Without an increase in the borrowing limit, the government couldn’t pay other obligations on time, such as Social Security benefits, bills from government contractors and Medicare reimbursements. Those payments are also legal obligations, Lew argues, and failure to pay them would essentially be equivalent to a default.
In any case, making some payments and not others is harder than it might sound. Treasury makes roughly 100 million payments a month. Nearly all are automated. Lew says the Treasury’s computer systems aren’t equipped to choose some and not others among all those outgoing checks. And without cash in reserve, any minor glitch could cause Treasury to miss a debt payment – and default.
“Treasury would do everything in their power to not miss a debt payment,” says Donald Marron, an economist at the Urban Institute and a former economic adviser to President George W. Bush. “But when you’re in untested waters under a great deal of stress, bad things happen.”
Q. What other problems might be raised by prioritization?
A. Consider the legal and political obstacles. The government is legally obligated to pay its contractors. If not, the contractors could sue for non-payment. And how long would members of Congress stand by as Treasury holders in China and other nations were paid interest, while payments to U.S. veterans and Social Security recipients were delayed?
Q. How would investors react if the government made its interest payments but fell behind on other obligations?
A. Badly, most economists say. If the government couldn’t pay veterans’ benefits, federal employee salaries or other bills, investors would almost certainly demand higher interest rates at future Treasury auctions. That would drive up the cost to taxpayers of servicing the government’s debt.
A failure to pay any obligation “would severely damage perceptions of our creditworthiness,” says David Kelly, chief global strategist at JPMorgan Funds.
Each week, the government issues new short-term debt and uses the proceeds to pay off maturing debt. This step doesn’t increase total debt. So it would still be allowed even if the borrowing limit wasn’t raised. But it’s possible that not enough investors would want to buy the new debt. That would leave the government short of cash to pay off its maturing debt. The result: a default.
Q. What else could Treasury do?
A. It could make its interest payments first – then delay all other payments until it collects enough tax revenue to make a full day’s payments. That would avoid choosing among competing obligations. Treasury officials favored this approach during the last borrowing-limit fight in 2011, according the Treasury Department’s inspector general.
But that approach would eventually cause extensive delays. On Nov. 1, nearly $60 billion in Social Security benefits, Medicare payments and military paychecks are due. With no increase in the borrowing limit, those payments could be delayed for up to two weeks.
Q. Could the president just ignore the limit?
A. Some experts say he could. The 14th Amendment to the Constitution says, “The validity of the public debt of the United States, authorized by law … shall not be questioned.” But the White House has said its own lawyers don’t think he has the authority to do so. Nor is it clear that many investors would buy bonds issued without congressional approval.
Q. Are global investors panicking yet?
A. No, not yet. The stock market surged on Thursday and Friday as Congress appeared to move closer to an agreement to raise the debt ceiling and perhaps end the partial shutdown of the government. But if prospects for an agreement were to dim early next week, stocks could sink. Investors would likely also dump Treasurys.
Interest rates on some short-term Treasurys have risen sharply in the past week. That shows that the deadline might be rattling some investors. The Bipartisan Policy Center estimates that the 2011 fight over the debt limit inflated federal borrowing costs by $1.3 billion, or about 0.5 percent, that year. Over 10 years, the estimated cost comes to nearly $19 billion.
Q. What would the economic impact of all this be?
A. Many foresee a nightmare. No longer able to borrow, the government could spend only from its tax revenue. This would force an immediate spending cut of 32 percent, the Bipartisan Policy Center estimates.
If the limit remained through November, Goldman Sachs estimates that spending would plummet by up to $175 billion. That’s equivalent to about 1 percent of the economy. On top of that, stock markets would likely fall. Household wealth would shrink. Consumer confidence could plunge. Americans would cut back on spending. Higher rates on government debt would raise other borrowing costs, including mortgage rates.
Q. Why is it potentially catastrophic for the government to miss a payment on its debt and default?
A. The repercussions would be felt worldwide. Banks in the United States and overseas use Treasurys as collateral when they borrow from each other. If Treasurys were no longer seen as risk-free, it would disrupt borrowing and jolt credit markets. A financial crisis like the one in 2008 could follow.
Banks also hold much of their capital reserves in Treasurys. If they fell in value after a default, banks would have to cut back on lending.
Senate Republicans and Democrats hit an impasse Sunday over spending in their last-ditch struggle to avoid an economy-jarring default in just four days and end a partial government shutdown that’s entering its third week.
After inconclusive talks between President Barack Obama and House Republicans, Senate Majority Leader Harry Reid, D-Nev., and Minority Leader Mitch McConnell, R-Ky., took charge in trying to end the crises, although a conversation Sunday afternoon failed to break the stalemate.
“I’m optimistic about the prospects for a positive conclusion to the issues before this country today,” Reid said as the Senate wrapped up a rare Sunday session.
The two cagy negotiators are at loggerheads over Democratic demands to undo or change the automatic, across-the-board spending cuts to domestic and defense programs that the GOP see as crucial to reducing the nation’s deficit.
McConnell insisted a solution was readily available in the proposal from a bipartisan group of 12 senators, led by Sens. Susan Collins, R-Maine, and Joe Manchin, D-W.Va., that would re-open the government and fund it at current levels for six months while raising the debt limit through Jan. 31.
“It’s time for Democrat leaders to take ‘yes’ for an answer,” McConnell said in a statement.
But six Democrats in the group and a spokesman for Collins said that while negotiations continued this weekend, there was no agreement.
The latest snag comes as 350,000 federal workers remain idle, hundreds of thousands more work without pay and an array of government services, from home loan applications to environmental inspections, were on hold on the 13th day of the shutdown.
Many parks and monuments remain closed, drawing a protest at the National World War II Memorial on Sunday that included tea party-backed lawmakers who had unsuccessfully demanded defunding of Obama’s 3-year-old health care law in exchange for keeping the government open.
Unnerving to world economies is the prospect of the United States defaulting on its financial obligations on Thursday if Congress fails to raise the borrowing authority above the $16.7 trillion debt limit.
Christine Lagarde, the International Monetary Fund’s managing director, spoke fearfully about the disruption and uncertainty, warning of a “risk of tipping, yet again, into recession” after the fitful recovery from 2008. The reaction of world financial markets and the Dow Jones on Monday will influence any congressional talks.
Congress is racing the clock to get a deal done, faced with time-consuming Senate procedures that could slow legislation, likely opposition from tea partyers and certain resistance in the Republican-led House before a bill gets to Obama.
Politically, Republicans are reeling, bearing a substantial amount of the blame for the government shutdown and stalemate.
“We’re in a free-fall as Republicans, but Democrats are not far behind,” said Sen. Lindsey Graham, R-S.C., in warning Democrats about seizing on the GOP’s bruised brand as leverage to extract more concessions.
McConnell and Republicans want to continue current spending at $986.7 billion and leave untouched the new round of cuts in January, commonly known as sequester, that would reduce the amount to $967 billion. Democrats want to figure out a way to undo the reductions, plus a long-term extension of the debt limit increase and a short-term spending bill to reopen the government.
“Republicans want to do it with entitlement cuts,” said Sen. Chuck Schumer, D-N.Y. “Democrats want to do it with a mix of mandatory cuts, some entitlements and revenues. And so how do you overcome that dilemma? We’re not going to overcome it in the next day or two.”
He suggested keeping the government running through mid-January.
Sen. Dick Durbin of Illinois, the No. 2 Democrat in the Senate, told reporters the two sides are roughly $70 billion apart, the difference between the $1.058 trillion Senate budget amount and the $988 billion envisioned by House Budget Committee Chairman Paul Ryan, R-Wis.
“We haven’t picked a number, but clearly we need to negotiate between those two,” Durbin said.
Republicans dismiss the latest request as Reid moving the goalposts in negotiations as they were getting closer to resolving the stalemate that has paralyzed Washington. They also argue that it is disingenuous for Democrats to resist any changes in the 3-year-old health care law while trying to undo the 2011 budget law that put the cuts on track.
“I think the Democrats are on the verge of being one tick too cute as they see the House possibly in disarray – they now are overreaching, and I think that what we’ve got to do is get this back in the middle of the road, act like adults,” said Sen. Bob Corker, R-Tenn.
Graham and Sen. Rand Paul, R-Ky., said they would not support any deal that upends the spending limits imposed by the 2011 law, and predicted that their Senate GOP colleagues would oppose it as well.
Out of play, for now, was the Republican-led House, where Speaker John Boehner, R-Ohio, told GOP lawmakers early Saturday that his talks with the president had ground to a halt. Obama telephoned House Democratic leader Nancy Pelosi on Sunday, focusing on the need for any increase in the debt limit without concessions.
Also sidelined, at least for now, was the plan forged by Collins and a bipartisan coalition to briefly fund the government and extend the $16.7 trillion debt limit, in exchange for steps like temporarily delaying the medical device tax that helps fund the health care law.
Democrats said Collins’ plan curbed spending too tightly, and Reid announced Saturday it was going nowhere.
Collins said Sunday that both Democrats and Republicans continue to offer ideas and say they want to be part of the group working to reopen the government and address the debt ceiling before Thursday’s deadline.
“We’re going to keep working, offering our suggestions to the leadership on both sides of the aisle in an attempt to be constructive and bring this impasse to an end. Surely we owe that to the American people,” Collins said.
Sen. Amy Klobuchar, D-Minn., a participant in Collins’ talks, said Reid wouldn’t accept everything in the Collins proposal, but he “knows there are some positive things in that plan,” such as opening the government in a “smart timeframe,” not defaulting on debt and doing something in the long term on the budget.
Klobuchar and Collins were on CNN’s “State of the Union.” Graham appeared on ABC’s “This Week,” Corker was interviewed on “Fox News Sunday,” Schumer spoke on CBS’ “Face the Nation” and Lagarde was on NBC’s “Meet the Press.”