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What's the debt ceiling? Why is the debt ceiling important?

The federal fiscal year ends at the end of September and if no agreement is found then the government will cease to function until a plan is found.

Sen. Rick Scott (R-FL) gestures as he speaks during a news conference on the debt ceiling at the U.S. Capitol on September 22, 2021 in Washington, DC.
Anna MoneymakerAFP

In a seriously packed legislative month, Congress is also tasked with increasing the debt allowance the US can have. Due to the last two years of high spending, the government can't pay for any of its new legislation. If the ceiling is not lifted, there will be a government shutdown as salaries won't be able to be paid.

To compound this, the US has to pay back billions in debt repayments at the end of the month too. With no extra money, it will be impossible to do this, which could lead to the US defaulting on its debt for the first time in history.

So what is the debt ceiling?

The debt ceiling is a borrowing cap that Congress sets each year. It isn't funding for new legislation, but for making sure legislation approved in the last year has enough money to function. Under the Trump administration, it was raised three times, the last time being in 2019.

The last time there was a government shutdown the economic fallout was serious. The Congressional Budget Office found that gross domestic product fell by 0.1% in the fourth quarter of 2018 and by 0.2% in the final quarter of 2019, costing up to $11 billion.

And if it's exceeded?

Then payments just stop. In the short term it would mean social security payments would stop, leaving soldiers and pensioners out of pocket. Payments for legislation such as the Child Tax Credit would end too, reversing the gains made over the last three months.

Along with the debt ceiling, the US needs to repay billions in debts before October. Were it to default on its loans, there would be a shock to the US and global economy. The dollar would fall in power and its use as reserve currency around the world would hurt other economies.

What is the government trying to do to prevent that happening?

The House of Representatives has passed legislation to lift the debt ceiling, but it has yet to be supported by the Senate. This is due to the move needing 10 Republican votes to pass, which have yet to be found.

The Republicans argue they don't want to lift the ceiling and spending to continue to increase. "We do not have divided government. Democrats do not need our help," Senate Minority Leader McConnell said in a statement. "They have every tool to address the debt limit on their own: the same party-line process they used to ram through inflationary spending in March and already plan to use again this fall."

It is a 'who will blink first' moment, as the prospect of a government shutdown reflects poorly on both parties, and the historicity of a first ever debt default is unconscionable for many Republicans.


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