GO
Loading...

Debt Ceiling: CNBC Explains

Getty Images

Unless Congress acts to raise the federal government's debt ceiling, the Treasury Department will run out of the ability to borrow money by October 17. Treasury has said that the cash it now has on hand will run out completely on November 1, leaving the government in essence without money to pay its bills.

So what is the debt ceiling? It's a cap set by Congress on how much the government can borrow in order to pay its debts. And here's why it's important:

Warnings about not raising the debt ceiling have been dire. The major credit rating agencies have said they might consider the U.S. in default if it fails to pay its bills, and many economists have warned that there could be a major slowdown to the economy, with job losses alongside a rise in interest rates affecting a range of products from credit cards to home mortgages.

Other fears are that foreign investment in U.S. Treasurys and the dollar would dry up over worries about lost returns.

Federal debt is the amount of money the government currently owes for spending on payments such as Social Security, Medicare benefits, military salaries, interest on the national debt and tax refunds.

But It is not future debt. The debt limit simply allows the government to finance existing legal obligations that Congress and presidents of both parties have made in the past.

The debt ceiling idea came about in 1917. Before then, Congress had to approve borrowing for each item when the government needed money.

But in order to have more flexibility as the U.S. entered World War I, lawmakers at that time agreed to give the government approval for all borrowing as long as the total was less than a specific number. That debt limit number would be set by Congress.

'Technical' default in 1979

Whenever the government is going to exceed a debt limit—meaning it needs more funding for current debt—Congress has to vote its approval to raise it.

As of October 2013, the debt limit is $16.7 trillion. But President Barack Obama has asked Congress to raise it.

If Congress fails to raise the debt ceiling, funds would not be available to pay bills and the U.S. government would technically be in default.

Since 1960, Congress has acted 78 times to permanently raise, temporarily extend or revise the definition of the debt limit—49 times under Republican presidents and 29 times under Democrats.

Technically, the U.S. defaulted on its debt in 1979, as Congressional talks to raise the debt limit reached a deadline. A deal was reached but the Treasury Department said it had "technical glitches" and was late in paying some of the bills after the deal was reached. But it was not a permanent default, as everyone was paid in full.

In 2011, a debt ceiling crisis was part of a debate in Congress about the appropriate level of government spending and its consequential impact on the national debt and the debt ceiling. (National debt is the sum of all outstanding debt owed by the federal government. It includes not only the money the government has borrowed, but also the interest it must pay on the borrowed money.)

The crisis was resolved with a complex deal that raised the debt ceiling and reduced proposed increases to future government spending, but it did not avert similar debates for future budgets and the debt ceiling.

—By CNBC.com.

Contact CNBC Explains

  • CNBC NEWSLETTERS

    Get the best of CNBC in your inbox

    › Learn More

Latest Special Reports

Central Banking Explained

Corporate Accounting Explained