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10 simple things that finally explain the debt ceiling

Posted by Angela Nelson, Boston.com Staff  October 7, 2013 12:12 PM

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By Dana Hatic, Boston.com correspondent

The new fiscal year began on Oct.1, at which point the government shut down without an authorized discretionary spending bill. But that’s only half the issue. The other half: the impending breach of the debt ceiling and the possibility that mandatory programs will go without the funding they are legally allocated. Confused? It’s understandable. Here are 10 things to explain the debt ceiling.

1. First of all, what is the debt ceiling/limit?
The debt ceiling is the maximum amount of money the government can borrow to fulfill its legal budgetary obligations. Those obligations are the mandatory spending requirements Congress has written into law that go unchanged year to year unless Congress acts to amend the law. Discretionary spending, on the other hand, is voted upon each cycle/fiscal year. Keeping the government from defaultingis a different debate than passinga bill to fund the government in the first place. (Source: Department of the Treasury)

When Congress acts to prevent the government from surpassing the debt limit, it does not authorize new spending, it merely allows for planned spending to continue.

By the numbers: Estimates from the Bipartisan Policy Center suggest that the government will breach the debt ceiling at a so-called “X-date” sometime between Oct. 18 and Nov. 5. With approximately $108 billion available for use as of Aug. 31, the government faces this dilemma: those funds will run out, and without an alternative monetary source, the BPC estimates that 32 percent of funds owed from Oct. 18-Nov. 15 would go unpaid.

2. Great. So…what does this mean and why are we talking about this?
If we hit the debt ceiling, the Treasury won’t be able to borrow money to pay for spending Congress has approved (the mandatory spending, not the discretionary spending, which is delineated in appropriations bills), essentially defaulting on its legal obligations, like paying for Social Security and Medicare benefits. Sounds bad, right? Think of it as defaulting on a loan, but with some unpredictable elements, as there is no precedent for the government breaching the debt ceiling.

The Department of the Treasury says if spending surpasses the debt ceiling without Congress voting to either extend the limit or cut down the budget, Americans will face higher borrowing costs, reduced retirement savings, and lower home values.

Let’s just say the government does breach the debt ceiling. In that case, according to the Bipartisan Policy Center, there will be two resources left for paying the bills: Remaining cash on hand and daily federal revenues. However, these funds are limited and are not a sustainable solution.

The president of the Federal Reserve Bank of Boston said these standoffs in Congress have the potential to derail the nation’s economic growth and recovery from the recession.

3. Is this the same thing as the government shutting down, and didn’t that already happen? How are they related?
No, it’s not the same. With a government shutdown, the fed still pays out on legal obligations. Surpassing the debt ceiling would stop, limit, and/or delay payments on such obligations.

But, it is related: The last time we came close to breaching the debt ceiling, in 2011, Congress reached a deal to delay hitting the ceiling… that left us with the “sequester.”

4. Remind me again…what is the sequester?
Congress needed to agree on a plan to reduce the US Government deficit by $4 trillion, or else a series of arbitrary spending cuts, totaling $85 billion, would take effect across the board in what came to be called the “sequester.”

It was the result of a compromise to prevent hitting the debt ceiling in 2011. Congress did not develop an alternative bill to cut the deficit, and the sequester took effect in March 2013.

5. If the government passes the debt ceiling without acting, how will it affect me?
Well…breaching the debt ceiling would “call into question the full faith and credit” of the US government. That kind of doubt could drive speculation and could lead to financial crisis.

WalletHub, a personal finance resource that offers tips for making prudent financial decisions and saving money, speculated that investors could begin asking for higher interest rates on US bonds, which could increase rates for credit cards, mortgages, and car loans, among other things. Defaulting could also impact business and consumer spending.

6. How will this affect my job?
“Non-excepted” federal employees do not report to work during a government shutdown. The effect on non-governmental jobs is less clear, but an overall economic stall or slowdown is a reasonable expectation.

7. What can I do about it?
WalletHub had suggestions for giving yourself a bit of padding if the so-called X-date comes without a solution. To begin with, you can maximize your emergency fund. Cut back on spending and save, just in case of higher prices or prolonged economic volatility. Fix variable rates: Credit card and loan rates could increase, so if you have debt tied up, look into consolidating it into fixed loan rates to stabilize yourself in case of a tumultuous market.

8. So, if the government’s shut down, what’s to be done about the looming debt ceiling?
Well, the government has some moves it could make. Let’s review: A back-and-forth between the House and the Senate failed to result in approval of a bill to finance the government. Congressional Republicans attempted to leverage passing a short-term spending bill for measures to delay and/or quash the Affordable Care Act. The Republican votes prevented a continuing resolution to temporarily fund the government. This meant that all “non-excepted” government employees could not report to work, and all excepted employees will work, but will not be paid until the government…is not shutdown. Members of Congress are excepted employees, and therefore can still act to address the approaching X-date. A couple of scenarios for you:

Pass a law to extend the debt ceiling: This is something akin to a playground kid losing a race then running past the finish line and the victor only to claim the line was ten feet past there all along.

If we hit the debt ceiling, the government could prioritize spending, paying for certain things and not others. The Bipartisan Policy Center suggests this is an unappealing and potentially infeasible process due to its complexity and the requisite overhaul of the payment system that feeds millions of funds. Approximately 32 percent of funds owed during the period between Oct. 18 and Nov. 15 would go unpaid.

Let the debt ceiling break: Similar to defaulting on a loan, breaking through the debt ceiling would reduce the credibility of the US government and could put the US and global economies at risk.

President Obama could play the 14th Amendment card and trump the statutory debt ceiling through the provision that says, “the validity of the public debt of the United States…shall not be questioned.” The president’s press secretary, Jay Carney, has suggested this was an unlikely option. President Obama has said he will not negotiate over “the terms of debt limit legislation but is willing to discuss a range of issues once the government is reopened and the Treasury able to borrow freely again.”

9. How much trouble will the government be in if we default?
Standard & Poor’s issues ratings for governments, known as “sovereign ratings.” These are used as indicators of “the future ability and willingness of sovereign governments to service their debt obligations to the nonofficial sector in full and on time.” As of Sept. 20, 2013, S&P had rated the US AA+ for the long term and stable. Did they speak too soon? Possibly. The dollar has already weakened against global currencies, and if the US defaults, this rating will likely go down.

10. We know Congress can be doing something about this. But what is it doing?
Congress failed to pass any appropriations bills this year. Now, during the government shut down, members are meeting to negotiate a solution. Congressional Republicans reportedly called for cuts in the budget to diminish the deficit, and Democrats blocked bills to reopen parts of the government.

All that being said… We don’t really know exactly what will happen if the government hits the debt ceiling. It has never happened before.

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