Debt limit: Some key questions about borrowing, default

AP News
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Posted: Oct 26, 2015 1:57 PM
Debt limit: Some key questions about borrowing, default

WASHINGTON (AP) — With one week to go, Congress must act fast and come up with a way to raise the federal borrowing limit or face an unprecedented government default.

It's commonly known as the debt limit, and increasing the government's borrowing cap is a must-do task. The United States has never defaulted on its debts and bills, but it's a politically toxic vote for most GOP lawmakers who insist the government must rein in its spending and are demanding concessions from President Barack Obama. The administration says there is no need for budget brinkmanship and the United States should pay its bills.

Republican leaders, led by Speaker John Boehner, R-Ohio, and Senate Majority Leader Mitch McConnell, R-Ky., were trying to come up with a plan this week and rally the rank and file to back it.

Here are some key questions and answers about the debt limit:

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What is the debt limit?

The debt limit is a cap on government borrowing. The Treasury Department has flexibility to manage the government's debts and cash flows and issue new debt that's needed to pay the bills as long as the cap hasn't been breached.

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Why does it have to be raised?

Even though the government's fiscal health is improving, it ran a $439 billion deficit in the just concluded budget year. The government must still issue bonds and Treasury notes to raise cash to meet its obligations. If the government runs out of money, it won't be able to pay its bills on time and in full. That means delays in Medicare payments to health care providers and Social Security benefits to recipients as well as a slowdown in paying interest on U.S. treasuries, military and civilian federal salaries and money to federal contractors.

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What's the deadline?

Last year, Congress passed legislation that permitted the government to borrow to meet its needs through March 15, when the debt limit was reset at $18.1 trillion. Since then, Treasury Secretary Jacob Lew has used accounting moves to free up cash, but such "extraordinary measures" run out on Nov. 3. Treasury will only have a modest amount of money on hand after that. It will be forced to rely on daily cash flows to pay its bills.

According to budget analysts at the Bipartisan Policy Center, a Washington think tank, the government wouldn't actually miss a payment until Nov. 10 at the earliest.

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What is a default?

It's commonly interpreted to mean that the government is late in making payments on U.S. Treasury securities. Under a broader definition, the U.S. would default if it's late in paying other bills as well.

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What happens if there is a default?

Well, it's never happened, so no one knows for sure.

Some experts believe financial markets would implode before the government misses a payment. If capital markets begin to have doubts about the creditworthiness of the United States, it would have a severe effect on global capital markets — as well as on interest rates on U.S. treasuries.

The government, however, has the ability to pay its debt obligations first. Treasury's payment systems aren't designed to prioritize other payments like Social Security benefits.

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How is default different from a government shutdown?

It's far more serious. A government shutdown, like the partial 16-day shuttering in 2013, only affects agency operating budgets. Then, important benefit programs like Social Security and Medicare were not interrupted and essential government workers like Transportation Security Administration agents, the military and the Border Patrol reported to work as scheduled.

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Why are the politics so tricky?

No one really wants to vote to issue more debt, especially tea party Republicans who dislike Obama. Not long ago, votes on the debt limit were conducted under an informal set of rules depending on which party controlled the White House and who controlled Congress. Basically, if you were aligned with the president you'd be expected to deliver support for a debt increase. So too would the party in control of Congress.