What Is The Debt Ceiling? 5 Things To Know

WASHINGTON, DC — As tensions in North Korea escalate, health care reform efforts are abandoned and the Russia investigation eats up much of the nation's political bandwidth, another simmering legislative crisis has the potential to subsume every other priority by the time Congress returns to the nation's capital. Lawmakers must vote to raise the federal debt ceiling by the end of September, or else the United States will enter default.

The idea of the debt ceiling is simple: Congress has authorized the federal government to spend a certain amount of money, but it doesn't have the funds on hand to pay for everything immediately. The U.S. Treasury borrows money to cover the gap, but it is only authorized to borrow up to a certain amount. Lawmakers have to continually raise the the amount the government can borrow to cover its spending.

Here's what you should know about the upcoming fight over the debt ceiling:

1. Defaulting on the debt would be an economic crisis.

Since the U.S. has never breached the debt ceiling before, which means defaulting on payments the government is legally obligated to make, no one can be sure what would happen. If bond holders were confident the issue would be resolved quickly, the impacts might be minimal. But failing to promptly make necessary payments could bring heavy costs.

"If the ceiling is not raised the United States will risk defaulting on its debts which will result in, among other things, a drop in the credit rating of the US government," said Cathy Barrera, chief economic adviser for ZipRecruiter. "The impact of such a drop will be felt for decades, as the interest rates on any future debt rise."

"The consequences become very significant very quickly," said Bankrate.com's chief financial analyst Greg McBride."

Consumer confidence would plummet, McBride said, and interest rates would rise. People looking for loans would face a lot more barriers, businesses would find it more difficult to raise capital and economic growth would slow.

But there's another possibility: The Trump administration could refuse to default on its payments and continue borrowing money against the law. Since Congress's allocation of spending priorities is also required by law, not making mandatory payments could be unconstitutional. In essence, the administration would face contradictory legal requirements, potentially causing a constitutional crisis.

2. A government shutdown fight also looms.

The government shutdown fight, which is distinct from the debt ceiling fight, also hangs over Congress. In May, Trump suggested that the country might need a "good shutdown." The federal government is only funded through the end of September, and if Congress doesn't authorize spending beyond this point, multiple government functions will cease.

The government shutdown and the debt limit breach are separate issues, but negotiating over both at the same time will certainly complicate matters.

3. Lawmakers have often used the debt ceiling to make symbolic stands.

Famously, then-Sen. Barack Obama voted against raising the debt ceiling in 2006 as a protest against the Bush administration's spending — a vote he said he regretted when he later became president. But before the Obama administration, lawmakers never really came close to allowing the government to breach the debt ceiling. Republicans tried to use the debt ceiling fights as leverage to extract demands from the Democratic president, and in 2011 Standard and Poor's, a loan evaluation agency, downgraded America's debt rating is response.

This may be happening again, even with a Republican- controlled House, Senate and White House.

"The debt ceiling needs to be raised," wrote the conservative Rep. Mark Walker in a Washington Examiner op-ed on Tuesday. "Nobody is advocating for a course of action that risks a fiscal crisis for the country. But the debt ceiling increase needs to be accompanied by reforms to address the problems that cause it.”

In other words, some Republican lawmakers still want to use the debt ceiling to enact controversial spending policies, even while acknowledging that defaulting the government debt would be a fiscal crisis.

4. Democrats may try to extract a deal.

If enough Republicans object to raising the debt ceiling, either on principle or strategically, the Democrats in Congress may have to join the president to approve additional borrowing.

Under Obama, Democrats repeatedly criticized the Republicans for using the the debt ceiling as leverage. Out of power, though, some in the leadership might rethink this position.

Last week, Democratic House Minority Leader Nancy Pelosi said, "I don't have any intention of supporting lifting the debt ceiling to enable the Republicans to give another tax break to the wealthy in our country.” This was interpreted as a potential negotiating stance on the measure, though Pelosi later clarified that she plans to support a "clean" debt ceiling bill without attaching any additional provisions.

5. This is all completely unnecessary.

"The debt ceiling is a limit that congress has imposed on itself for spending that’s already been committed to," McBride said. "So the whole notion of the debt ceiling is basically theater."

If lawmakers are concerned about the rising debt, they can address these concerns by raising taxes or reducing spending. Breaching the debt ceiling has many potential negative consequences, and it doesn't address the fundamental cause of government borrowing.

Many argue that the best move forward would be to simply eliminate the debt ceiling entirely. As long as Congress keeps authorizing the federal government to spend money above what taxes generate, it could simply allow the Treasury to borrow the funds it needs.

"While some argue that government spending must be reined in, a reduction in spending can only be achieved through the budget -- an entirely separate act," said Barrera of Ziprecruiter. "Not raising the debt ceiling will not only be ineffective at reducing spending, but it also has the potential to force increases in future spending by increasing interest payments."

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