The federal government is shut down. But theres more mayhem to come: Congress still has to face the debt ceiling. If lawmakers dont vote to raise the nations borrowing limit by Oct. 17, the U.S. government wont have enough money to pay its bills.
The Treasury Department says failure to raise the limit could trigger a default, which would lead to a financial crisis and recession that could echo the events of 2008 or worse.
Q: What is the debt ceiling?
A: When Congress authorizes spending more money than it has in tax revenue – which it usually does – the Treasury has to borrow the rest to meet those financial obligations. But Congress has always imposed a legal limit on how much money the U.S. Treasury can actually borrow from outsiders and other government accounts. The current debt limit is $16.699 trillion.
The debt ceiling does not determine how much the U.S. government is authorized to spend. Congress does that by setting the budget each year. The debt ceiling only determines whether the U.S. government can borrow enough money to fulfill obligations that Congress has already passed into law.
Q: So when will the government reach its borrowing limit?
A: The U.S. government actually hit the $16.699 trillion borrowing limit back on May 19. Since then, the Treasury Department has taken a slew of extraordinary measures – such as tapping exchange-rate funds – to raise an extra $303 billion and ensure that the government has enough cash to meet all its obligations, such as paying bondholders and cutting Social Security checks. By Oct. 17, however, the Treasury Department will not have enough cash to meet all its coming financial obligations, and it wont be able to borrow or scrounge up any more money.
Q: What happens on Oct. 17?
A: At that point, the federal government will only bring in enough tax revenue to pay about 68 percent of its bills for the coming month, according to a recent analysis by the Bipartisan Policy Center. The first default wouldnt necessarily happen right on Oct. 17 – but it would likely happen soon thereafter.
Q: But the government is currently shut down. Doesnt that push back the doomsday date?
A: Even during the shutdown, the government is still required to make all sorts of other payments, including Social Security, Medicare, military pay and interest on the debt. And those are the big-ticket items.
Q: What happens when the government doesnt have money to pay its bills?
A: The most straightforward scenario is that the governments computer systems would keep making payments until its checks started bouncing. And its hard to predict in advance who would get stiffed.
Every day, computers at the Treasury Department receive more than 2 million invoices from various agencies. The computers make sure the figures are correct and then authorize the payment. This is all done automatically, dozens of times per second.
According to the Treasury Departments inspector general, the computers are set up to make each payment in the order it comes due. So if the money isnt there, the defaults could be random.
Q: Cant the government just pay important bills and delay the rest?
A: Probably not. This idea is known as prioritization, and its been floated before. During the last debt-ceiling fight in 2011, Sen. Pat Toomey, R-Pa., suggested the government focus on paying bondholders and the military and retirees and delay the rest. Trouble is, prioritization on the fly may be logistically infeasible, argue Shai Akabas and Brian Collins of the Bipartisan Policy Center in a recent report. That view is shared by Mark Patterson, a former chief of staff at Treasury.
Q: What would be the economic consequences of breaching the debt ceiling?
A: A prolonged breach could result in a massive dose of fiscal austerity – overall outlays would drop by 32 percent – putting a dent in economic growth.
The financial response is harder to forecast. The Treasury Department certainly thinks the prospect of missing a payment could be ruinous: Credit markets could freeze, the value of the dollar could plummet, U.S. interest rates could skyrocket, the negative spillovers could reverberate around the world, and there might be a financial crisis and recession that could echo the events of 2008 or worse.
Q: Whats the point of a debt ceiling? Should we abolish it?
A: Back when the debt ceiling was first adopted in 1917, it was arguably a useful device for Congress to prevent the president from spending however much he wanted. But since 1974, Congress has created a formal budget process to control spending levels.
In a January survey of academic economists by the University of Chicago, 84 percent agreed that having a debt ceiling creates unneeded uncertainty and can potentially lead to worse financial outcomes.