Latest developments in debt ceiling standoff

AP News
Posted: Jul 27, 2011 5:27 PM
Latest developments in debt ceiling standoff

Congress has until Aug. 2 to raise the federal borrowing limit or the government will run out of money and possibly default on its debt. House Republicans say they won't raise the debt limit without equal spending cuts. President Barack Obama and Democrats have insisted that higher revenues must be included.

Wednesday's developments: House Republicans appeared to be coalescing around a plan by House Speaker John Boehner to increase the U.S. borrowing limit and chop $1 trillion in federal spending. But the White House dismissed the proposal as did Senate Democrats and tea party activists. Still, there are hints a compromise might be near.

Markets react: Stocks are closing lower on more signs that the economy is deteriorating and as the U.S. edges closer to defaulting on its debt. With the default deadline nearing, investors are becoming more fearful that the U.S. rating could be lowered. That would raise interest rates and slow down the already weak economy. The Dow Jones industrial average fell 199 points.

What's next: The House plans a vote Thursday on Boehner's plan. Senate leaders are watching what happens to the House plan before moving ahead with their own.


Some background:

Q: What is the debt ceiling?

A: It's a legal limit on how much debt the government can accumulate. The government takes on debt two ways: It borrows money from investors by issuing Treasury bonds, and it borrows from itself, mostly from the Social Security trust fund, which comes from payroll taxes. Congress created the debt limit in 1917. It's unique to the United States. Most countries let their debts rise automatically when government spending outpaces tax revenue. Congress has increased the debt limit 10 times since 2001.

Q: What is the federal deficit, and how does it differ from the debt?

A: The deficit is how much government spending exceeds tax revenue during a year. Last year, the deficit was $1.29 trillion. The debt is the sum of deficits past and present. Right now, the national debt totals $14.3 trillion _ a ceiling set in 2010.

Q: Why is the prospect of not raising the debt ceiling so worrisome?

A: The government now borrows more than 40 cents of each dollar it spends. If the debt ceiling does not rise, the government would need to choose what to pay and what not, including benefits like Social Security, wages for the military or other bills. It also might delay interest payments on Treasury bonds. Any default could lead to financial panic weakening the country's credit rating, the dollar and the already hobbled economy. Interest rates would likely rise, increasing the cost of borrowing for the government and ordinary Americans.

Q: Who holds the $14.3 trillion in outstanding U.S. debt?

A: The U.S. government owes itself $4.6 trillion, mostly borrowed from Social Security revenues. The remaining $9.7 trillion is owed to investors in Treasury securities _ banks, pension funds, individual investors, state and local governments and foreign investors and governments. Nearly half of that _ $4.5 trillion _ is held by foreigners including China with $1.15 trillion and Japan with $907 billion.

Q: How did the debt grow from $5.8 trillion in 2001 to its current $14.3 trillion?

A: The biggest contributors to the nearly $9 trillion increase over a decade were:

_2001 and 2003 tax cuts under President George W. Bush: $1.6 trillion.

_Additional interest costs: $1.4 trillion.

_Wars in Iraq and Afghanistan: $1.3 trillion.

_Economic stimulus package under Obama: $800 billion.

_2010 tax cuts, a compromise by Obama and Republicans that extended jobless benefits and cut payroll taxes: $400 billion.

_2003 creation of Medicare's prescription drug benefit: $300 billion.

_2008 financial industry bailout: $200 billion.

_Hundreds of billions less in revenue than expected since the Great Recession began in December 2007.

_ Other spending increases in domestic, farm and defense programs, adding lesser amounts.