Everything you need to know about the debt ceiling and government shutdown showdown

  • Oops!
    Something went wrong.
    Please try again later.

Democrats in Congress are juggling two separate financial challenges right now on Capitol Hill, as they try to provide funding for the government to avoid a shutdown and also work on raising the debt ceiling.

Here’s what that means, and why this is a momentous and historic week in Congress.

The Capitol
Congress returns this week to a full schedule of pending legislative items. (Win McNamee/Getty Images) (Win McNamee/Getty Images)

What’s the difference between a government shutdown and the debt ceiling?

Many of the federal government’s operations will shut down if Congress cannot pass a law authorizing more money to fund it by Oct. 1, which is Friday. Though that would not constitute a full-blown economic crisis, it would disrupt many parts of American life that interact with the federal government.

The debt ceiling is different. It’s a limit on how much money the government can borrow to pay for what it has already spent and owes to creditors. Much of the debt that needs to be repaid by raising the ceiling is from funds that were spent under former President Donald Trump. If the debt ceiling isn’t raised by around October 18, the U.S. government would potentially default on its debt, and that would be “substantially worse than the collapse of Lehman Brothers in 2008, devastating global markets and the economy,” Ann Bovino, the chief U.S. economist for S&P, a major credit rating agency, wrote.

In a piece for the New York Times, Michael Strain, director of economic policy studies at the American Enterprise Institute, the right-leaning think tank, warned that failure to raise the debt ceiling would be catastrophic.

“Chaos would reign: plunging stock values, the stirrings of a fresh global financial crisis, an erosion of America’s credibility when it comes to honoring its debts. After a day or two of this calamity, the debt ceiling would almost certainly be raised through overwhelming bipartisan action. But damage would be done. Investors would think twice about holding Treasury securities, fearing that fulfilling the basic functions of government is beyond Washington’s ability, leading to higher interest rates,” wrote Strain.

So why are the shutdown and debt ceiling related?

Harry Reid, left, and Chuck Schumer
Then-Senate Majority Leader Harry Reid, left, with Sen. Chuck Schumer at a press conference about the debt ceiling in October 2013. (Jim Watson/AFP via Getty Images) (Jim Watson/AFP via Getty Images)

Senate Democrats tried to pass a spending bill Monday evening to fund the government for two months until Dec. 3, combined with raising the debt ceiling for a little over a year, until December 2022.

But Republicans voted against this.

Why would Republicans do that?

Republicans say they refuse to vote to raise the debt ceiling. They want to vote just to fund the government, but not to raise the debt ceiling.

Why? Well, they say they don’t want any part of a massive spending bill that Democrats plan to pass, which would provide lower prescription drug prices, expanded health care and childcare, continued child tax credits, free community college tuition and climate change efforts, among other things. That bill is known as the “reconciliation bill,” or the $3.5 trillion budget bill.

Related: What's in the Democrats' big spending bills and how they would affect your life >>>

Senate Minority Leader Mitch McConnell has called the spending bill “permanent socialism” and raised concerns that more spending would add to inflation. Democrats say they are going to pay for the spending by raising taxes on wealthy individuals and large corporations, although some budget experts doubt the tax hikes will generate enough revenue.

Don’t Democrats control the Senate and the House?

Nancy Pelosi, Janet Yellen and Chuck Schumer
Front, from left: House Speaker Nancy Pelosi, Treasury Secretary Janet Yellen and Senate Majority Leader Chuck Schumer. (Kent Nishimura/Los Angeles Times via Getty Images) (Kent Nishimura/Los Angeles Times via Getty Images)

Indeed they do. But because of the filibuster, either party can block legislation that doesn’t have the support of 60 or more senators. Republicans can block almost anything they don’t like because there are 50 of them in the Senate, and 50 Democrats.

There is a loophole in all this, called budget reconciliation, which would allow Democrats to pass some things — such as that $3.5 trillion budget — with a simple majority. In such a scenario, Vice President Kamala Harris would cast the tie-breaking vote.

The problem is, Democrats have not attached the debt limit increase to the big budget bill they’re already trying to pass through reconciliation, and to do so would take a week or longer.

So won’t Democrats just separate the shutdown and debt ceiling?

Yes, they probably will. They’ll need to pass a funding bill to avert a shutdown before Thursday at midnight. And then they’ll probably need to attach the debt ceiling to the $3.5 trillion spending bill.

The tricky thing for House Speaker Nancy Pelosi is that while all this is going on with the shutdown and the debt ceiling, she’s trying to pass a $1 trillion infrastructure package that would improve roads and bridges, and get enough support from Democrats to also pass the $3.5 trillion spending bill.

The $1 trillion infrastructure bill, which passed the Senate last month with 19 Republican votes, and the $3.5 trillion budget bill that has no GOP support, both need Democratic votes to survive. Moderate Democrats say they won’t support the budget bill if they don’t get the infrastructure bill passed in the House. And progressive Democrats say they won't support the infrastructure bill unless they get the budget bill.

Nancy Pelosi
Pelosi at the Capitol on Monday. (Chip Somodevilla/Getty Images) (Chip Somodevilla/Getty Images)

Pelosi has set a vote on infrastructure for this Thursday. In exchange for supporting the infrastructure deal, progressives will want to feel certain by then that the budget bill also has enough votes to pass. But the debt-limit issue complicates Pelosi’s ability to nail all this down.

This is the biggest challenge Pelosi has faced since the 2010 health care battle in the House. Even if we assume Congress passes the debt ceiling increase in time to avoid an economic crisis, the stakes for the Democratic Party are high. If they cannot get their agenda passed, their strongest supporters will be deflated and discouraged, and their loudest critics will paint them as dysfunctional and weak.


Read more from Yahoo News: