Five Things You Need to Know About the Debt Ceiling

By Ann Sullivan

By all accounts, the U.S. will default on its monthly spending obligations of roughly $100 million by early fall, unless the Congress raises the debt ceiling. Secretary of the Treasury Steven Mnuchin sounded the alarm, urging Congress to act quickly.  As the debate starts heating up, below is a guide to understanding the debate amongst all of the partisan noise and media hype.

1.  Why does the Congress need to raise the debt ceiling? If Congress fails to raise the debt ceiling, the nation won’t be able to borrow any more money to finance the existing financial commitments agreed to by Congress and the President.  This includes payments to contractors, social security recipients, Medicare and Medicaid payments and veteran’s pay – literally everything the government writes a check for.

2.  What is the difference between the debt and the deficit?  The deficit is a result of the government spending more than the revenue it takes in, and is calculated from year to year.  The federal debt is an accumulation of the government’s annual budget deficits, or the amount of money the government owes.

3.  Has Congress ever missed the deadline? Yes. However, Congress has always taken action at the final hour before it’s really too late. In 2011, lawmakers failed to raise the debt ceiling by the May deadline established that year. Congress ultimately raised the debt limit in August through the Budget Control Act of 2011—only two days before the Treasury estimated it would run out of funds. While initially Wall Street reacted negatively to the threat, it’s now seen as a yearly bluff.

4. Why does this happen every year?  Congress establishes an annual budget. Raising the debt ceiling allows the government to pay the bills for expenses already incurred by Congress, which is done on an annual basis.  It used to be considered a relatively noncontroversial action, but that is no longer the case.

5. What is a “clean” debt ceiling bill?  Clean means sticking to the debt ceiling language without attaching other policy “riders.” As partisan gridlock worsens, the budget becomes the vehicle to pass legislation, making it an important tool for lawmakers on both sides of the aisle.  Treasury Secretary Mnuchin called for a clean bill, but that idea isn’t popular with the House Freedom Caucus. They “demand that any increase of the debt ceiling be paired with policy that addresses Washington’s unsustainable spending by cutting where necessary, capping where able and working to balance in the near future.”