The Outcome of the Boehner Proposal That Passed the House and Frequently Asked Questions (FAQs) about the Debt Ceiling and the Federal Debt
July 29, 2011
The House passed Speaker John Boehner's plan to raise the U.S. debt limit and cut spending, a bill Senate Democrats said they would kill as they press for an alternative approaching an Aug. 2 deadline to avoid default.
"We've done everything we can to find a common-sense solution," said Boehner of Ohio, who pressed reluctant members of his own party to support a measure that Senate Democratic leaders plan to table and President Barack Obama has pledged to veto. ''This House has acted,'' the speaker said, and it's time for Democrats and Obama "to put something on the table."
The vote was 218-210, with no Democrats voting for it.
House Democratic leader Nancy Pelosi of California said Republicans, with deep spending cuts tied to their debt-ceiling increase, are trying to dismantle decades of bipartisan legislative progress designed to help middle-class Americans.
Senate Immediately Tables Boehner's Bill
The United States Senate quickly dispatched the debt ceiling bill passed by the House Friday evening, tabling the Republican bill indefinitely and moving quickly to start consideration of a Democratic plan that would avoid default on Tuesday.
Less than two hours after House Speaker Boehner pushed his bill through the House over the strenuous objections of nearly two dozen of his own Republican members, the Democratic leadership in the Senate followed through on their promise to kill his legislation.
But the move now sets up an uncertain 72 hours as the Congress moves ever closer to the Tuesday deadline when the Treasury Department says the country will default on its financial obligations without an increase in the debt ceiling.
Mr. Reid said he intends to start the legislative clock ticking on Friday on a new plan to raise the debt ceiling. But Mr. Reid could wait until later in the evening on Friday to allow more time for negotiation throughout the evening.
Senator Reid's Proposal
Senate Majority Leader Harry Reid, a Nevada Democrat, planned to proceed to a vote on his competing measure while holding out hope for a compromise with Republican leaders as they near an Aug. 2 deadline set by the Treasury Department for action on the debt limit.
Lawmakers are working through the weekend. Senate procedures would allow an initial vote on Reid's plan at about 1 a.m. on July 31, and the measure could be altered any time before that vote. A Senate vote then could be held at about 7 a.m. on Aug. 1, allowing the measure to return to the House before the Aug. 2 deadline.
Obama may invite congressional leaders back to the White House for more talks, according to a Democratic official. No decision has been made about further discussions between Obama and Democratic and Republican congressional leaders, said the official, who wasn't authorized to speak publicly about the administration's strategy.
Short Term Stop-Gap Measure
The White House reitierated that President Obama would accept a short-term debt ceiling extension of a few days only if needed to finish work on legislation lifting the limit for a longer period.
House Republican leaders revised their bill after failing to win enough support for a vote last night. It would allow a debt-limit increase now and require Congress to work out a second increase agreement within months. The second debt-limit increase would occur only if a balanced-budget constitutional amendment is passed by Congress and sent to the states.
Representative Mo Brooks, an Alabama Republican, said the decision to include the balanced-budget amendment turned 10 to 20 Republican votes in favor of the measure.
Democrats who control the Senate oppose the balanced budget agreement, and Reid said today he asked Republican leader Mitch McConnell of Kentucky to meet with him and "negotiate in good faith knowing the clock is running down."
Senate Democrats, working to break the impasse, are trying to devise a strict enforcement mechanism to guarantee future deficit savings, according to Democratic officials.
Future Cuts
Behind the scenes, officials said, talks on a potential deal centered on how to force future deficit-cutting by Congress, by setting up consequences - such as automatic spending cuts or tax increases, or some combination of the two - if the savings aren't achieved.
Boehner's measure would provide an immediate $900 billion debt-ceiling increase while cutting spending by $915 billion. It would allow Obama to seek a second, $1.6 trillion installment of borrowing authority if Congress enacted a law by Christmas to slash deficits by $1.8 trillion. That would set up yet another debt-limit showdown early next year if lawmakers were unable to agree to such a plan.
Obama has called such an approach unacceptable, saying it could lead to a downgrade of U.S. credit and continued economic uncertainty.
Boehner and Reid's Bills
Overlap exists between Boehner's plan and Reid's. Reid dropped Democrats' insistence on tax increases. Both proposals take as their starting points a cut of close to $1 trillion in discretionary spending over 10 years, and both establish bipartisan congressional committees to recommend future savings leading to a guaranteed up-or-down vote by year's end.
Sources: San Francisco Chronicle, Roll Call and Congressional Quarterly
Frequently Asked Questions (FAQs) about the Debt Ceiling and the Federal Debt
What is the debt ceiling?
Also known as the debt limit, the debt ceiling is the amount of gross debt the federal government can incur. The current limit is $14.3 trillion, which the government surpassed on May 16, 2011, causing Treasury officials to scramble for bookkeeping maneuvers to buy time. Treasury Secretary Timothy Geithner has set an August 2 deadline for raising the debt ceiling. Failure to pass a bill could result in the first default in U.S. history.
How is the debt ceiling raised?
The debt limit is written into law, and any increases must be codified in new legislation passed by Congress and signed by President Obama.
Have lawmakers raised the debt ceiling before?
The debt ceiling has a long history. The government first enacted the limit in 1917 in order to issue bonds during World War I. Policymakers have raised the debt limit 74 times since 1962, most recently in February 2010 when they tacked on an extra $1.9 trillion to bring the ceiling to its current level.
Is raising the debt ceiling a partisan issue?
Since 1962, the U.S. has reached its debt ceiling 74 times, about once every eight months. Usually, the ceiling has been raised with little notice outside Washington and little, if any, change in the trajectory of government spending. But when opposing parties have held the White House and Congress, the process has always been contentious.
What if the ceiling is not raised and the government defaults?
A default occurs when the government does not have enough funds to meet any of its legally mandated fiscal obligations, including paying interest on its existing debts, federal employee salaries, tax refunds, and Social Security and Medicare payments. A default could potentially damage the government’s credit rating, lower demand for U.S. assets, deprive federal workers of their salaries, and deny Social Security benefits to retirees, potentially triggering a wide-reaching economic crisis.
Has the government defaulted before?
To date, the federal government has never defaulted on its securities, though it has in a few cases restructured debt or made some of its interest payments late (in 1790, 1933 and 1979). Until a debt limit deal is reached, the government must draw down its cash balances to avoid issuing new debt, or suspend investments and redeem securities in accounts such as the Civil Service Retirement, which bring it closer to defaulting.
Who holds / owns the federal debt?
Currently the United States government borrows 40 cents for every dollar it spends. This borrowing is accomplished by the United States selling Treasury securities (government bills, notes or bonds) of varying maturities.
For investors, the government bills, notes and bonds are considered a safe financial product because they have a guaranteed rate of return, based on investors’ faith in future U.S. tax revenues. The government has been partially funding operations via Treasury securities for decades.
This borrowing adds to the national debt. Much of that debt is held by the private sector, but about 40 percent is held by public entities, including parts of the government.
An interactive chart showing who holds the federal debt can be found here: http://innovation.cq.com/media/debt_components/
If we just raised the debt ceiling without a plan to reduce deficits, would there be any effect on the nation's credit rating?
The “Big Three” credit rating agencies – Moody's, Standard and Poor’s (S&P) and Finch – have said that if the debt ceiling is not raised, the nation's credit rating could be downgraded. That is not, however, all that they said.
The nation is currently on a fiscally unsustainable course. The costs of three government programs, Social Security, Medicare and Medicaid, are rising so rapidly that they threaten to bankrupt the country. If this were to happen, the United States might find itself in a situation such as Greece recently did, where it cannot pay its creditors.
For this reason, the credit rating agencies have warned that if Congress and President Barack Obama do not also make changes that would put the nation on a path toward fiscal sustainability; they might downgrade the nation's credit rating. A debt ceiling increase without a significant deficit reduction package could, therefore, also lead to a credit rating downgrade.
What is a credit downgrade?
When the United States issues government bonds, those bonds are assigned a credit rating that reflects the risk of default on that debt instrument. Many pension funds and investors are required to buy AAA-rated Treasury bonds because they're considered the safest.
Rating agencies have warned that if they determine whatever action Congress takes fails to sufficiently improve the national debt outlook, they may change the U.S. debt rating to AA or lower. That would mean the United States no longer would be viewed as the safest of bets; investors instead would look to Germany, France, Great Britain and Canada as safer alternatives.
Why is maintaining the United State’s Triple A bond rating important?
For starters, if U.S. bond ratings were lowered, the U.S. government would have to pay a higher interest rate to investors in its bonds, because they would be viewed as a riskier asset. Because the United States already borrows to pay the bills it owes, that's the equivalent of having your personal credit rating fall and the interest rate on your credit card go up. Even if you borrow less, the rising interest cost will make reducing your debt more difficult.
Sources: Congressional Quarterly, The Wall Street Journal, CNN Money, Politico, Money Magazine, the Economist, CNBC and The Financial Times.
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