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Shutdowns and debt limits: Making sense of the fiscal deadlines ahead

Pete Marovich | Bloomberg | Getty Images

The stock market may be posting record gains, but Washington could be mere days away from a government shutdown—and a few weeks out from a catastrophic default on the national debt.

But the reality of this looming fiscal crisis has many Americans wondering how we ever got ourselves into this mess. And, more importantly, what Congress can do over the coming days to avoid it.

We take a look at some of the questions that lawmakers dealing with – and the possible answers.

What do Congress and the president need to do to meet these deadlines?

First, Congress must pass a spending bill, called a continuing resolution or "CR," which would continue spending after Sept. 30, the end of the 2013 fiscal year.

If, as expected, the Senate rejects a House-passed CR that defunds Obamacare, then Speaker John Boehner might be forced to consider a "clean" CR with no provisions attached.

If he and Majority Leader Eric Cantor can't find enough votes among their own members to pass a clean CR, they may seek Democratic votes to pass a measure which doesn't include a "defund Obamacare" provision.

Obama and his spokesmen have repeatedly said he would not accept any resolution that would delay or defund Obamacare.

(Related video: Battle over Obamacare)

What happens if Congress doesn't pass a spending bill?

There would be a funding shortfall and the executive branch would begin a partial shutdown of federal operations.

Some workers would be furloughed and some agencies would suspend their functions.

The most recent partial shutdown lasted 21 days in late 1995 and early 1996 when President Bill Clinton and GOP congressional leaders couldn't agree on the terms of a spending bill.

In the aftermath of that showdown, the consensus among both Democratic and Republican strategists was that Clinton emerged stronger, while House Speaker Newt Gingrich and Senate Majority Leader Bob Dole were damaged.

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Dole, a reluctant partner in the Gingrich shutdown strategy, said to his chief of staff at the time, "There's a lot of people (federal employees) not being paid, through no fault of their own. I've had enough of explaining away a strategy that makes absolutely no sense."

What operations would continue even if there was a partial shutdown?

The law allows operations necessary to the safety of human life or protection of property to continue even in the event of a partial shutdown.

(Read more: Debt ceiling fight 'damn dumb,' says Warren Buffet)

In past shutdowns, workers with national security and foreign relations responsibilities – such as CIA and State Department employees – have been exempted from furloughs, according to the Congressional Research Service.

Other exemptions have included programs and employees related to:

  • Inpatient and emergency medical care
  • Air traffic control
  • Border and coastal patrol
  • Care and guarding of federal prisoners
  • Emergency disaster assistance

If there was a partial shutdown, what operations would likely be stopped?

Most of the decisions about this would be left to the executive branch. But the Congressional Research Service detailed the closures and suspensions related to the most recent shutdowns. Some of the fallout:

  • New patients weren't accepted into clinical research at the National Institutes of Health; phone calls to NIH about illness went unanswered.
  • The Centers for Disease Control stopped monitoring diseases.
  • Testing and recruitment of federal law enforcement officials ceased, including border patrol agents.
  • National parks, museums and monuments closed.
  • Most U.S. applications for passports went unprocessed.
  • Services for U.S. veterans were curtailed.

What's the debt limit and when is the deadline for that?

Separate from the spending bill impasse is the fight over the debt limit. As it stands now, the government's legal authority to borrow more money runs out in mid-October.

The congressionally mandated limit on federal borrowing is currently set at $16.7 trillion. The debt limit has been raised 13 times since 2001 and has grown from about 55 percent of Gross Domestic Product in 2001 to 102 percent of GDP last year.

(Read more: What is the 'debt ceiling,' anyway? We explain)

What would happen if the debt limit were reached?

At that point, the Treasury "would be left to fund the government with only the cash we have on hand on any given day," said Treasury Secretary Jacob Lew.

Money from tax payments would still be coming in to the Treasury, but it would not be enough to pay each day's bills. While some bills to vendors and others could be paid, they'd be paid late.

Investors holding Treasury securities might not get prompt re-payment of their principal when their bonds matured. That in turn could cause a downgrading of U.S. Treasury securities by bonds rating agencies.

According to the Bipartisan Policy Center, if that date arrived on October 18, the Treasury "would be about $106 billion short of paying all bills owed between October 18 and November 15 … ."

It estimated that about a third of the funds owed for the period would go unpaid.

Could the Treasury juggle bill payments, paying some vendors and beneficiaries but not others?

According to the Bipartisan Policy Center, the Treasury "might attempt to prioritize some types of payments over others," but "this option may not be possible to implement using Treasury's current financial systems. It would involve sorting and choosing from nearly 100 million monthly payments."

What stands in the way of Congress increasing the debt limit?

There are two big roadblocks. First, Boehner wants additional spending cuts in return for increasing the borrowing limit. "You can't talk about increasing the debt limit unless you're willing to make changes and reforms that begin to solve the spending problem that Washington has," Boehner recently said.

Obama opposes additional spending cuts, if not paired with tax increases.

Second, Boehner will try to attach a provision to the debt ceiling increase that would delay Obamacare provisions such as the requirement that uninsured individuals buy health insurance. Obama is not likely to accept this.

How does the current spending and debt impasse differ from the one that occurred in the summer of 2011?

Then there was serious bargaining between Obama and Boehner on a deal that might have included both tax increases and curbs in the growth of entitlement spending. Those talks failed.

(Read more: Debt ceiling, not tapering, is the bigger market risk)

Obama did a sign a $3.9 trillion tax increase into law at the end of 2012, which is one reason Republicans won't agree to any further tax increases.

No sweeping bargain on entitlements and taxes is in sight at this point.

What effect might a partial shutdown and a failure to raise the borrowing limit have on the economy?

A shutdown and even more a failure to raise the debt limit could frighten investors and further destabilize financial markets.

In a taped interview that aired Friday on CNBC, billionaire investor Warren Buffett said if Republicans and Obama were to fail to reach an agreement to raise the nation's borrowing authority, that would be "pretty damn dumb."

At his press conference Wednesday, Federal Reserve chairman Ben Bernanke said, "A government shutdown and, perhaps even more so, a failure to be raise the debt limit could have very serious consequences for the financial markets and for the economy."

He said the Federal Reserve would "do whatever we can to keep the economy on course. And so if these actions led the economy to slow, then we would have to take that into account, surely." But he cautioned that "our ability to offset these shocks is very limited, particularly a debt limit shock."

He urged Congress and the Obama administration to "avoid any kind of event like 2011, which had, at least for a time, a noticeable adverse affect on confidence and on the economy."

—By Tom Curry, NBC News.

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