[Oct 2021 Update] Republicans and Democrats reached a temporary comprise on raising the debt limit. Under bill S. 1301, the debt limit was increased by $480 billion, which is expected to be sufficient to allow the Federal Government to continue to meet its full commitments through early December.
This issue around raising the debt limit further will come to the fore again in December or early in 2022 and the same political partisan bickering around this topic will likely continue.
[Sep Update] The political drama surrounding raising the debt ceiling has come to the fore with Republicans deciding not to vote for it in protest against the unilateral $3.5 trillion spending plan the Democrats are pushing through via the budget reconciliation process.
Instead the Republicans want the Democrats to pass the debt ceiling increase via party lines (again through reconciliation process) so that when it comes to the mid-term and presidential elections they can say they were the party of austerity. Which is ironic given the massive revenue reduction measures (up to $5 trillion) passed via the Trump Tax cuts when the Republicans were in power.
What is the Debt Ceiling Limit?
The federal debt is the amount of money the government currently owes for spending on payments such as Social Security, Medicare, military salaries and tax refunds. It is money that has already been spent and the ceiling is adjusted to allow the Treasury to finance those existing obligations.
Think about it like paying off the credit card balance for purchases already made. If your credit limit is not raised and you cannot pay off past debts then you won’t be able to buy anything. So you are essentially considered financially broke!
Despite popular misconception, raising the debt ceiling doesn’t authorize additional spending of taxpayer dollars. However politically the Republicans have done a masterful job of tying the Democrats proposed spending plans to the debt limit, which is already at record levels.
Congress and the White House have changed the debt ceiling almost 100 times since the end of World War II, according to the Committee for a Responsible Federal Budget. In the 1980s, the debt ceiling increased to nearly $3 trillion from less than $1 trillion. During the 1990s, it doubled to nearly $6 trillion, and doubled again in the 2000s to over $12 trillion.CNBC
What happens if the Debt ceiling limit is not raised?
Congress must raise the debt limit by Oct. 18 or the country runs the risk of default according to Treasury Secretary Yellen warns. This would mean delays in key government payments like Social Security checks, Monthly Child Tax Credits (CTC) and veteran’s benefits. This would affect millions of receipients who rely on these checks to make ends meet.
Further a government default (or even the real risk of one) would increase borrowing costs that could trigger a market sell-off and economic downturn.
[Aug 2021 update] Raising the debt ceiling has come to center stage again in Washington D.C. as Senate Republicans threatened to vote against an increase or suspension to the debt ceiling unless Congress first agrees to new spending cuts or other measures, to counteract President Biden massive spending bills. The debt ceiling takes effect Aug. 1, which if not raised could risk default of US backed debt securities.
The new ultimatum marked a reversal for Republicans, who agreed to address the debt ceiling — the statutory amount the government can borrow to pay its bills — multiple times to advance policies under President Donald Trump that helped add $7 trillion to the federal debt during his term. The last time Congress voted to suspend the debt ceiling was in 2019, covering the extension to the end of July 2021. Since then, the nation has added $6.5 trillion in debt, bringing the total amount owed to $28.5 trillion.Washington Post
If Congress cannot reach a deal to raise or suspend the ceiling by month’s end, the government would have to rely on what are known as “extraordinary measures” to keep paying its bills. This was used in some of the prior debt ceiling showdowns (see earlier update), but caused a lot of market volatility due to the uncertainty it creates locally and globally.
The national debt debate continues with millions of federally funded individuals and corporations facing the real prospect of taking a big hit to their bottom line if the debt ceiling is not raised. Whichever side of the debate you are, the fact is that over the past 30 years the debt ceiling has been increased by both parties and a number of democratic and republican presidents. This is borne out in the graphic below from the Washington post.
The biggest contention on a “big debt” deal being reached is essentially around including tax hikes and/or repeal of current tax breaks as part of the equation to justify raising the debt ceiling. While spending cuts, which mainly affect those who rely on government funded entitlement programs, will reduce how much needs to be borrowed, tax hikes provide a much more long lasting source of revenue and generally affects a smaller base of higher income earners. This is what the democrats are saying.
Republicans on the other hand feel that any tax hikes or repeals will slow down economic growth since small and large business owners, who will be the primary groups impacted by tax hikes, will cut back on spending and hence hiring.
Both parties have debt reduction plans in place and next week Republicans will put forward their plan for a vote in the house (which they control) while Democrats will try and muster more support for the President’s proposals. However neither party has the numbers to get a plan all the way through Congress and unless tax hikes are in the plan, Obama will not sign off on the deal.
My opinion is that if no debt reduction plan is reached in the next two weeks a short term extension will be put in place for an interim increase in the debt ceiling. Congress and the American economy will then continue to muddle along until a more effective plan is put in place. But I would be willing to bet that we will be back to square one the next time it comes to raising the debt ceiling. The game of political football will resume once again.