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Just like you and me, the federal government can run out of money if it does not plan ahead and like us it can have dire consequences.
The House of Representatives voted today to raise the debt ceiling, after a vote in the Senate last week. Raising the debt ceiling allows the government to borrow money to cover its existing financial obligations, but unfortunately this is only temporary.
Congress also did not extend government funding for the new fiscal year until early December.
If you think this could turn out to be a long, arduous last month of the year for lawmakers – and Americans who might ultimately be affected by their decisions – you are probably right.
But while the idea of ââthe debt ceiling may seem remote from the lives of ordinary Americans, the way it is handled in the months to come could have an impact that will trickle down to your own financial situation.
Here’s what you need to know about the current debate over raising the debt ceiling.
What is the debt ceiling?
The debt ceiling, or debt limit, is the amount of money the United States federal government is allowed to borrow to pay its bills. These bills include items such as Social Security payments, salaries for military and federal employees, and tax refunds. The country also has to pay interest on debt it has already incurred to pay older bills.
If the country does not increase its debt limit, it is like maximizing a credit card: the bill paying activity stops and the government does not live up to the financial commitments it has made.
This could cause delays in the payments you expect from the government, and it could impact the cost of purchasing items on credit, the Treasury Secretary has warned. A default could also cause turmoil in the stock market, which could affect the value of your investments.
The discussion of the debt ceiling can be confusing because public spending â the budget â is often discussed simultaneously. But while they are connected, these are two separate challenges for lawmakers.
“Raising the debt ceiling does not authorize additional spending of taxpayer dollars,” Treasury Secretary Janet Yellen wrote in a Wall Street Journal op-ed last month. “Instead, when we raise the debt ceiling, we are effectively agreeing to increase the country’s credit card balance.”
Read more: Janet Yellen is sounding the alarm bells on the debt ceiling. Will it help prevent a crisis?
It can be even more confusing because another term that you might hear a lot right now is the deficit.
The deficit is different from the national debt. The deficit is what happens when the government spends more money in a fiscal year than it brings in through taxes and other revenues. National debt is money that is borrowed to cover deficits, a common tab of what the country owes lenders. The federal government has a debt of over $ 28 trillion.
When was the last time the debt ceiling was raised?
Congress voted in 2019 to suspend the debt limit for two years and take on more debt. As in the current situation, the country was approaching the ceiling of the debt limit. This period ended on August 1, 2021 and the limit has been reapplied.
The Treasury Department was expected to run out of cash by mid-October. The bill that was passed to TKTK filled the coffers with an additional $ 480 billion, but the Treasury Department warned cash would run out around December 3.
Yellen spelled out the worst-case scenario if the United States defaulted on its debt: âWe could see indefinite delays in critical payments. Nearly 50 million older people could stop receiving social security checks for some time. The troops might not be paid. Millions of families who depend on the monthly child tax credit could experience delays.
Read more: Missed your September Child Tax Credit payment? Here are 3 things you should know
Some Republicans have linked their opposition to raising the debt ceiling to concerns about the Biden administration’s spending plans, but the current debt situation is largely due to spending by the Trump administration, including massive tax cuts adopted in 2017.
Yellen wrote: “Even if the Biden administration had not authorized any spending, we would still need to tackle the debt ceiling now.”
Reaching the debt ceiling: a problem that often happens
Every time the country has approached the debt ceiling (17 times since 2001), Congress has voted to raise or suspend the debt ceiling.
However, in 2011, the threat of default led S&P Global Ratings (formerly Standard and Poor’s) to downgrade the country’s credit rating. Essentially, the United States has been marked as less trustworthy to lend.
Raising the debt limit is generally not a partisan issue that only Democrats or Republicans support. There is generally a shared acceptance that lifting the limit is essential to keeping the economy in good working order.
But it is not always an orderly process.
What are the stakes if the debt ceiling is not raised
In addition to issues such as the inability to pay troops or lack of Social Security funds, Yellen warned that if the United States defaults, it will plunge the economy back into recession while we are still suffering. the financial shockwaves of the covid pandemic19. Federal Reserve Chairman Jerome Powell echoed those sentiments.
A default, Yellen explained, could cause interest rates to spike and stock prices to fall. And consumers would bear the brunt of the higher borrowing costs that would result from a federal government default when they want to buy a home, car, or anything that requires a loan or credit card.
Read more: Tackling the debt ceiling could damage your finances. Here’s how.
As the world’s largest economy, if the U.S. government defaults and the economy stumbles, there would be a global ripple effect in financial markets. It would also make it more expensive for the Treasury to borrow money, which would increase federal debt more quickly.
What happens next?
Congress has many negotiations going on at once, and the debt ceiling is one of them.
Lawmakers are simultaneously considering several things:
- The debt ceiling issue: the debt ceiling is suspended until December 3.
- Federal budget for the coming fiscal year – Congress extended funding until Dec. 3 (yes, the same deadline as the debt ceiling). The new fiscal year began on October 1.
- The $ 3.5 trillion Build Back Better package, which has stalled in Congress due to a price debate.
- The $ 1 trillion infrastructure bill.
The infrastructure bill enjoys bipartisan support, but its success is tied to an approval vote on the Build Back Better bill, which Democrats intend to push through reconciliation without support Republicans. This bill contains many elements of “social infrastructure”, such as child care, education and vocational training, which were removed from the original infrastructure program.
Read more: Will I benefit from the child tax credit in 2022?
Republicans in Congress have expressed concern over the price to be paid for Build Back Better, saying it’s too much to spend as the economy continues to recover from the pandemic. Even some Democrats aren’t sold on the $ 3.5 trillion on offer, with Senator Joe Manchin (D-WV) trying to garner support for a package that costs no more than $ 1.5 trillion.
This concern about government spending is reflected in the budget discussion and concern about the deadline for the debt ceiling.
While the Treasury is unlikely to run out of cash before the long-term debt ceiling is lifted, the existing tension in Congress means it will likely be a fight that will come down to the wire when it is revised in December.