Healthcare debates have recently consumed the spotlight on Capitol Hill, but Treasury Secretary Steven Mnuchin has been worrying about the country’s debt limit.
What is a debt ceiling?
The debt ceiling — sometimes called a debt limit — is a limit on the amount of national debt that can be issued by the U.S. Treasury.
By setting hard limit, the debt ceiling controls how much money the federal government is allowed to borrow, so in the simplest sense it’s like a credit card limit, but on a much bigger scale. By extending the debt limit, Congress and the president are essentially agreeing to a higher credit limit for the federal government.
Only two countries manage their spending with a debt limit: The United States and Denmark.
The U.S. established its debt ceiling during during World War I, essentially to make Congress’ job easier. By setting a debt limit, Congress wouldn’t have to approve spending for every transaction, but it could maintain some control over the Treasury Department.
The Danes created their ceiling in the 1990s, simplifying the day-to-day responsibilities for their Ministry of Finance. Danish lawmakers set the limit high enough that they have never actually come close to it, making Denmark’s debt ceiling pretty uncontroversial.
The U.S.’s debt ceiling was uncontroversial at first, as well. However, the U.S. has to raise its debt ceiling often — Congress has acted 78 separate times to raise, extend or revise the definition of the debt limit since 1960 — and some lawmakers now use these debt limit votes to make a statement.
President Barack Obama is a great example of this: In 2006, he refused to approve a debt-limit increase, which he later said was a political move that wasn’t in the best interest of the country. It’s a way that the minority party can make a point, using their votes as leverage to open a new conversation.
Though it can sometimes stir up opposition from the minority party, raising the debt ceiling is not a partisan move. Of the 78 adjustments made since the 1960s, 49 were under Republican presidents and 29 were under Democratic presidents.
Why does Mnuchin want to raise it now?
Mnuchin has tried to raise the debt ceiling since March, when the country hit the current limit of almost $20 trillion. He hoped to have the ceiling raised before the House went on summer recess, but healthcare debates consumed Congress’ attention.
Last Friday, Mnuchin sent a letter to lawmakers, stating that the federal borrowing limit (aka the debt ceiling) needs to be raised by Sept. 29. If the limit isn’t raised by then, Mnuchin will be in a precarious position, as the Treasury likely will lack the resources to fund government payments.
This estimate gives lawmakers 12 working days to resolve this issue after they return from summer recess, cutting it very close to a federal default.
Mnuchin said he’s been employing “extraordinary measures” since March to keep government operations running, but there isn’t much he can do when these measures run out.
As explained on the Bipartisan Policy Center blog, when it comes down to it, the U.S. cannot afford to default. The authors of one opinion piece liken it to “your credit cards being stopped, leaving you just with the money in your wallet.” This means that without a debt limit raise, the country would no longer be able to pay its bills.
Takeaway
The Treasury has exhausted all of its extraordinary measures before, so it’s not clear what a default would entail, but it undoubtedly wouldn’t be good.
A default on such a large scale could set a variety of economic problems in motion, launching the United States into uncharted and unstable economic territory. The government wouldn’t be able to maintain routine payments, such as Social Security checks, or pay interest on debt.
In order to increase the debt limit, Republican and Democratic lawmakers will have to work together, and as The Wall Street Journal points out, that may not be easy.
When lawmakers return from August recess, they have less than a month until Mnuchin’s impending deadline of Sept. 29, but they also face the end of the fiscal year on Sept. 30. Hopefully, Congress can get government spending in order quickly; if not, they may face a problematic government shutdown.
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