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The US Debt Ceiling Explained WETM

(WETM) – Congress has just under three weeks to come up with a plan to raise the debt ceiling or the United States will run out of money.

The US Treasury expects to run out of cash on October 18, the so-called “Date X,” and if the debt ceiling is not suspended or raised by then, the government will default on its loans.

The debt ceiling is a big part of the drama in Congress and is used as political leverage, but what does it really mean?

What is the debt ceiling and how does it work?

The most important distinction: raising the debt ceiling does not not allow the government to spend more money. Instead, it allows the government to borrow money to pay off debts it has already accumulated.

In other words, it’s a cap on what the government can to borrow, not how much the government can to pass.

Under the Trump administration, the United States added more than $ 7.5 trillion in debt, and now those invoices are due.

In order to avoid a government shutdown and default on its loans, the government must increase the debt ceiling in order to borrow money that will be used to pay off all that debt.

Does raising the debt ceiling allow the government to spend more money?

No, this is not the case.

Raising the debt ceiling does not increase the federal budget.

“Raising the debt ceiling does not allow additional spending of taxpayers’ money,” Treasury Secretary Janet Yellen wrote in a Wall Street Journal op-ed. “Instead, when we raise the debt ceiling, we are effectively agreeing to increase the country’s credit card balance.”

However, politicians are trying to use the debt ceiling as political leverage, claiming that those who want to raise the ceiling just want to spend more money.

In reality, Senator Mitch McConnell called for the debt ceiling needs to be increased because of the $ 3.5 trillion tax and spending bill and other Democratic priorities.

But it’s backwards. Raising the debt ceiling is needed to offset past spending – not future – including Republicans’ $ 1.5 trillion, the deficit-funded tax review Trump enacted in 2017, and additional trillions coronavirus relief that was passed with GOP support.

Essentially, Rthe publicans don’t want to pay what is due, which is the money spent during the previous administration.

Deficit against debt?

The current national debt is approximately $ 28.5 trillion. But how did we arrive at this figure?

In 2019, Congress passed legislation to suspend the debt ceiling for another two years. At that time, the limit was around $ 22 trillion. This suspension expired at the end of July 2021, and by that time the United States had added an additional $ 6.5 trillion, bringing our total debt to $ 28.5.

But this number is not the same as our national deficit. The government deficit is the difference between what it spends and invests (in things like Social Security, Medicare / Medicaid, and military salaries) and what it raises in taxes.

Debt and deficit are linked. As the United States continues to spend more than it earns, this deficit contributes to the overall national debt.

Why can the government borrow more money to pay bills that already exist?

At the individual level, a person or a family cannot simply borrow more and more money each year to pay their existing bills. In other words, you cannot continue to pay a credit card bill with another credit card.

However, nationally and globally, “this is how government works,” said Martin Cantor, consultant economist at Long Island. “The days of cashing out are long gone. “

“Every country runs on debt because in order to have capital spending, for infrastructure, you have to borrow money. There is no way to raise a trillion dollars for infrastructure by raising taxes. It is a debt.

Raise the ceiling vs suspend?

Raising the debt limit is exactly what it sounds like. Congress and Senate are voting to increase the number to allow the government to borrow money to pay its bills.

When Congress voted to temporarily suspend the debt ceiling in 2019, it removed that borrowing ceiling. So when the suspension expired on August 21, the debt limit was increased to cover the amount of debt added during those two years.

In August, because the government technically reached the debt ceiling, the Treasury then launched “extraordinary measures” to avoid a shutdown. The New York Times says these measures “are essentially fiscal accounting tools which slow down certain public investments so that the bills continue to be paid”.

What if we eliminated the debt ceiling?

Some argue that the United States should just get rid of the debt ceiling.

Removing the debt ceiling would also eliminate the risk of the government running out of money. This means that there would be no risk of the United States defaulting on its loans, which, in turn, means there would be no risk of the government shutting down.

This step would allow spending and taxes approved by Congress and the President to determine the amount of debt issued by the government, instead of a legally binding but otherwise redundant cap.

What if the government defaults?

Secretary of the Treasury Yellen warned on September 28 that the debt ceiling must be raised by October 18. This is the date when the Treasury estimates that it will run out of money to repay its loans.

If the cap is not raised, the United States will default on the money it borrowed. And if the US federal government were to default, it would lead to global economic disruption.

But Cantor says it’s extremely unlikely to happen because the risk is too high.

“The yield on treasury bills would fall, which means that interest rates would have to rise to attract borrowers, it would create absolute turmoil in financial and debt markets for the United States if we ever defaulted.” on our debt. “

Basically the credit rating of the United States would collapse and it would become many more difficult to borrow money.

Cantor says to think about a mortgage. If you have a mortgage on your house and can’t pay it off, what happens?

“They are excluding you. You have to use your credit card, or you have to get a raise where you work in order to pay off a mortgage, ”Cantor said. “So you just think of it like a real estate mortgage, and that’s really what happens. “

The United States has never defaulted on its loans in the 100 years that the debt ceiling has existed. Normally, both parties want to avoid a default.

During the Trump administration, Democrats joined the Republican Senate majority in repeatedly voting to raise or suspend the cap, but now, with Democrats in control of Washington, Republicans are unwilling to reciprocate.

The Associated Press contributed to this report.