With hours remaining before the deadline, Congress on Tuesday raised the federal borrowing limit or the government would have run out of money and possibly defaulted on its debt.
Tuesday's developments: The Senate, by a 74-26 vote, passed emergency legislation to avoid a first-ever government default. President Barack Obama signed it about an hour later. The measure trims spending by more than $2 trillion, and the debt ceiling itself would rise by nearly the same amount. No tax increases were included in the deal.
Markets react: The stock market was preoccupied with signs of weakness in the economy, and the Dow dropped more than 200 points. The passage of the measure on the debt ceiling apparently reinforced general worries about the economy.
What's next: Obama signaled that Congress still needs to find a balanced approach to reducing the deficit that includes some adjustments to Medicare and reforming the tax code so the wealthy pay more. A new bipartisan super committee of 12 lawmakers picked over the next two weeks will start the search for at least $1.2 trillion more in deficit cuts over the next decade.
Moody's Investors Service says the United States will retain its triple-A bond rating following passage of legislation to boost the debt ceiling. But the rating agency says it is lowering the outlook for possible future changes to negative.
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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.
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