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What's the debt limit and why is Congress about to raise it again?
WASHINGTON — While Congress has been focused on creating a new health care law and confirming President Trump's Cabinet nominees, lawmakers have paid scant attention to a looming Thursday deadline to raise the government's debt limit so that it can pay its bills and avoid a potentially devastating economic crisis.
The U.S. Treasury Department's power to borrow money will expire on March 16 unless Congress acts quickly to raise the debt ceiling. Although the Treasury won't run out of cash to pay creditors until sometime this fall, any delay in raising the debt limit could risk the government's credit rating and cost taxpayers billions of dollars in increased borrowing costs.
Here's a look at what's at stake:
The debt limit, also called the debt ceiling, is the legal amount that the U.S. Treasury can borrow to pay the government's bills, including Social Security and Medicare benefits, military salaries, tax refunds, interest on the national debt, and other obligations. The limit is set by Congress.
No. When Congress raises the limit, it doesn't allow the government to go out and spend taxpayer dollars on new programs or purchases. It merely allows the Treasury to borrow money to pay existing bills for spending that Congress has already approved.
Right now, there is no set limit. Congress suspended the limit as part of a 2015 budget deal that expires on Thursday, March 16. Congress needs to reset the limit to about $20 trillion to reflect the nation's current debt.
It always has before, and it is expected to do so again. However, it's not clear whether lawmakers will act by Thursday.
The issue could be complicated by the fact that some conservative Republicans are hoping to tie any increase in the debt limit to legislation to reduce the nation's $441 billion deficit. However, House Minority Leader Nancy Pelosi, D-Calif., said at a recent event hosted by Politico that Democrats will only support a "clean" debt limit increase that has no other legislation attached to it.
"We stand ready to work with the president to lift the debt ceiling — a clean debt ceiling, not one that is bogged down in ideological who-knows-what," she said.
The Treasury Department would be forced to use "extraordinary measures" to keep raising cash to pay the government's bills. Treasury Secretary Steven Mnuchin has told congressional leaders that the department will begin Wednesday to suspend the sale of state and local government bonds, which count against the national debt.
"I encourage Congress to raise the debt limit at the first opportunity so that we can proceed with our joint priorities," Mnuchin said.
Mnuchin's extraordinary measures "would probably be exhausted sometime this fall," according to the Congressional Budget Office. At that point, the government would be unable to pay its creditors and would default on its debt — something that has never happened before.
Congress has missed the deadline to raise the debt limit in the past, but it has always taken action before the Treasury actually ran out of money to pay its creditors. In 2011, lawmakers failed to raise the debt ceiling by that year's May deadline, resulting in Standard & Poor's downgrading the government's credit rating for the first time in history. (Lower credit ratings can result in higher borrowing costs, potentially costing American taxpayers billions of dollars.) Congress finally lifted the debt limit in August, just two days before the Treasury estimated it would have run out of funds to pay the bills.
No one knows for sure because Congress has never allowed it to happen, but economists say it could plunge the U.S. back into recession and spark a global economic crisis.
The government wouldn't be able to pay back people who invested in U.S. Treasury bonds. Those bondholders range from individual Americans and their pension plans to the Chinese and Japanese governments. Because the U.S. government spends more that it collects in taxes, it relies on these investors to help raise revenue.
Failing to pay back investors would cause the value of U.S. bonds to plummet. At the same time, the government would have to pay a higher return to investors because bonds would no longer be seen as a safe investment. That could cause interest rates to go up throughout the world because global rates are tied to the value of U.S. bonds.
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