Tom: This morning, we are talking debt ceiling, correct?
Mellody: We are, Tom. It may seem like déjà vu all over again, but the debt-ceiling squeeze is back. Treasury secretary Jack Lew has said that the debt ceiling needs to be raised in two weeks, by November 3. As you know, the last few times that this issue has come up, it has been a huge point of contention in Washington, and it has often come down to the wire or resulted in a government shutdown. So this morning, before the battle is engaged (again), I wanted to run through a short primer on the debt ceiling for our listeners, to get them up to speed and let them know how they may be affected.
Tom: OK! First things first, tell us what the debt ceiling is?
Mellody: The debt ceiling is simply the limit set by Congress on the amount of debt that the U.S. Treasury can issue.
Last year, Congress voted to suspend the limit and allow the Treasury to issue debt for the government to operate on until mid-March of 2015. The prior limit of $16.7 trillion was then recalculated to include the new debt. When it was recalculated on March 16, the limit was reset at $18.1 trillion. Now, Congress needs to lift that ceiling to enable to government to continue business as usual.
Tom: Is the debt ceiling lifted for future spending?
Mellody: Great question! A lot of the fights in Washington have seemingly centered the fact that lifting the debt ceiling will force spending cuts. Because of this, congressional efforts to lift the debt ceiling in the last few years have become difficult votes for some lawmakers because they are viewed as one way to force fiscal restraint. If your bank doesn’t increase your credit card limit, the thinking goes, you’re going to have to cut back on spending. However, this is not the case. Raising the debt ceiling allows Congress to pay for things that it has already decided to spend money on. Around one-third of federal spending is discretionary, for which Congress approves annual spending bills with specific instructions about how to spend the money. The other two-thirds is mandatory, meaning money is spent on certain programs established by existing law, such as Medicare, Medicaid and Social Security. So, not raising the debt ceiling is like hiring someone to build your house, then not paying them.
Tom: What happens if the debt ceiling is not raised?