Debt Ceiling Debate: Everything You Need to Know

NEW YORK (MainStreet) — After months of heated debate, the debt ceiling drama continues to unfold in Washington, and one way or another, the first part of this story will come to an end a week from Tuesday when the country officially hits its borrowing limit.

As we’ve come closer and closer to that deadline – and as the rhetoric about the consequences of failing to raise the debt limit have grown increasingly heated – more Americans have been forced to pay closer attention to a subject that in previous years they might otherwise have only followed peripherally, if at all.

Unfortunately, like all dramas the longer the debt ceiling debate goes on, the more complicated it seems to become. And if you’re someone who is just starting to pay attention the debate now, it may feel impossible to follow along. So MainStreet decided to break it down and offer you some cliff’s notes for the debate so far.

What: The debt ceiling currently stands at $14.3 trillion (and change) and represents the maximum amount of money the federal government is authorized to borrow in order to pay off its expenses. In essence, you can think of it as your credit card limit in that you can keep spending money you don’t have to pay off your bills until you max out. The two major differences though are that the U.S. has substantial preexisting commitments that must be paid for and the federal government can’t just charge off the excessive debt it owes to foreign countries in the way that consumers might with their creditors. So if the debt limit isn’t raised by the deadline, the government might have no choice but to cancel some Social Security and Medicare payments.

But in truth, the need to raise the country’s debt ceiling is nothing new. Since 1940, Congress has approved 91 debt ceiling bills, 73 of which raised the limit by varying amounts, while 11 other bills kept the limit constant and extended the period of time it was approved for. Indeed, the debt ceiling was raised 17 times under Ronald Reagan, seven times under George W. Bush and three times so far under President Obama.

What is different this time is just how much debt the country has and also the cast of characters inside and outside the beltway influencing the debate.

Why: If the country’s balance sheet were better, Washington wouldn’t be embroiled in this ongoing debate. But for much of the past decade, America has quite simply been living too deeply in the red.

As of the beginning of 2001, the U.S. was projected to have a budget surplus of more than $2 trillion by 2011. Instead, we’re more than $14 trillion in debt. So what happened? Much of this can be pinned on the tax cuts instituted under President Bush in 2001 and 2003, which account for a whopping 13% of the total change in the country’s debt projections. This, combined with the previous president’s initiatives to launch two wars in the Middle East, create an unfunded Medicare prescription plan and introduce a bailout program for troubled financial institutions, is responsible for much of the debt we have today.

But President Obama is certainly not guilt-free. Facing a dire economy on the verge of a full-blown recession or worse, the current president launched an $800-billion stimulus package and extended the Bush-era tax cuts. Moreover, the bad economy hurt businesses across the country and put many out of work, which in turn meant the government collected less revenue in taxes, while it was spending extra money to prop up businesses and workers.

To make matters worse, just like consumers, the U.S. must pay interest on the money it borrows, which has put the country in a position where the cost of its debt is spiraling ever more out of control. Fearing this, many legislators decided to put up a fight against raising the debt ceiling for the 74th time.

Who: The key players in the debt ceiling debate have changed several times in recent months, but the initial terms of the discussion were set by members of the Republican leadership, influenced largely by the new but strong voices of freshman legislators from the Tea Party. These lawmakers argue that the only way the debt ceiling should be raised is if substantial spending cuts are attached to bring the country’s spending-to-revenue ratio closer in line.

Back in May and June, Vice President Joe Biden took center stage and moderated debt ceiling discussions between congressional leaders on both sides of the aisle to find ways to cut government spending by enough to appease Republicans, without sacrificing beloved programs that would effectively lose the support of Democrats. The vice president’s talks helped lawmakers find about $2 trillion in spending cuts before talks ultimately broke apart.

Following that, President Obama took control of the discussions and began meeting regularly with Speaker of the House John Boehner (R-Ohio) in late June and early July to hammer out a proposal to stave off the impending debt default. At several points the pair was thought to be near a breakthrough, but each time, one or the other has expressed dismay with the negotiations. As of the end of last week, the main deal in question was a proposal to cut some $3 trillion from the debt, an ambitious goal, but one that would require hundreds of billions in tax revenue, something the Speaker and much of his caucus are opposed to.

These talks imploded once again late Friday, and now many secondary characters have come into the limelight to find a way forward. Senate Majority leader Harry Reid (D-Nev.) introduced a proposal calling for $2.7 trillion in spending cuts to raise the debt ceiling through 2012. Speaker Boehner is crafting a two-step proposal that would raise the debt ceiling for six months and then require renewal in the lead-up to the elections.

Senate Minority Leader Mitch McConnell (R-Ky.) is promoting a plan that would give President Obama the authority to raise the debt ceiling on his own. And House Republicans passed a bill late last week dubbed “Cut, Cap and Balance” that features steep spending cuts and a balanced budget amendment to the constitution so that the federal government, like the vast majority of states, would have to balance its books each fiscal year.

Everyone has a proposal, but none have broad approval, and the clock is ticking to pick one.

When: Technically, the government has already passed its deadline. The U.S. hit the $14.3 trillion debt ceiling in May, but the Treasury Department stopped contributing to pension funds that were not “immediately required to pay beneficiaries” to buy the country some extra time.

The new drop dead deadline is Aug. 2, when the country will officially begin defaulting on its obligations, except that even this date may not be set in stone. As one report from Barclays Capital shows, the U.S. may have taken in slightly more tax revenue than expected, buying the country yet another week until the money finally runs out. If true, the new, new deadline would be Aug. 10.

Even so, it would be better to end this debate sooner than later. Investors and credit rating agencies are growing increasingly skeptical of our country’s financial outlook and ability to pass legislation to support the economy, businesses at home may lose confidence and hire fewer workers, and relationships in Congress seem to grow more and more frayed each day.

This story has dragged on far too long. That much almost everyone will agree on.

—For a comprehensive credit report, visit the BankingMyWay.com Credit Center.

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