What is the debt limit and why is everyone in Washington talking about it?

Congressional leadership is nearing a deal that will raise the U.S. debt ceiling and stop the government from defaulting, the consequences of which could devastate the economy. The proposed deal would allow Democrats to raise the debt ceiling on their own — after initial help from a small group of Senate Republicans.

The deal comes just weeks before a potential default on the nation’s debt, adding to the tension and the consequences if it falls through. If the debt limit is breached, experts predict devastating consequences throughout the economy.

Why is there a debt limit ceiling in the first place?

In the early 1900s, Congress instituted the debt ceiling to allow the Department of the Treasury to issue payments without going to the legislature to get approval for borrowing each time it needed to make an expenditure. The U.S. government borrows vast amounts each year to make up for revenue shortfalls, and relies on that ability to borrow so it can function.

In the decades that followed, the lifting of the debt ceiling was regularly done on a bipartisan basis (nearly 80 times since 1960) and with little drama.

What happens if the ceiling isn’t raised?

Failure to raise or suspend the debt ceiling could cause the government to default on a number of payments, crashing financial markets and potentially triggering a massive recession. Earlier this year, Moody’s Analytics estimated that the subsequent damage could be up to 6 million jobs lost and a stock market decline that could eliminate $15 trillion of household wealth.

U.S. government debt is normally among the safest investments, and if the Treasury ran out of money to pay its obligations, it could have potentially calamitous effects for years to come.

The Bipartisan Policy Center, a Washington think tank, projected that the federal government would default between Dec. 21 and Jan. 28 if no action is taken. The exact date is uncertain due to tax revenue the government still receives.

When was the last time the debt ceiling was raised?

In October, when 11 Republican senators voted along with Democrats on a short extension that pushed the decision to December. Democratic leaders in Congress had previously agreed to a deal with the Trump White House for a clean, two-year suspension of the limit in 2019.

What is the plan to raise it?

On Tuesday, Democrats in the House and one Republican voted to pass a bill that would allow a one-time action to raise the debt ceiling in the Senate with just Democratic votes as long as at least 10 Republicans in that chamber help move the process along. It would likely solve the issue through the November 2022 midterms and would be tied to legislation to help shore up Medicare and farm aid funding, after consideration was also given to tying the debt ceiling to legislation funding the military.

“I would expect to be able to be for it,” Sen. Roy Blunt, R-Mo., a member of Senate Minority Leader Mitch McConnell’s leadership team, said of the plan. “I think it’s less of a problem for us on the Medicare bill than it would have been on the defense authorization bill.”

McConnell said Tuesday afternoon that the deal was “good for the country” and “good for Republicans.” He had said in October he would not help Democrats raise the debt limit again, a message he also pushed all summer.

The Senate could begin the process of raising the debt ceiling as soon as Thursday.

Why is the GOP refusing to help lift the debt ceiling this time?

Congressional Republicans have said they will not help raise the debt limit because, they argue, it’s up to Democrats to pay for items they’ve passed on party-line votes.

Democrats passed the COVID-19 relief plan in March along partisan lines and hope to do the same with President Biden’s Build Back Better social spending bill. However, the programs currently being paid for through borrowing are existing obligations, passed over previous years by both parties. Raising the debt limit now would not help Democrats pass Biden’s domestic agenda.

Additionally, McConnell was consistently attacked by former President Donald Trump for working with Democrats and agreeing to raise the debt ceiling in October. But the debt limit was suspended three times during Trump’s term and was used to finance the 2017 tax cuts.

“I’m going to support Democrats raising the debt ceiling without Republican votes,” Sen. John Cornyn, R-Texas, said Tuesday. “To have Democrats raise the debt ceiling and be held accountable for racking up the debt is my goal. And this helps us accomplish it.”

Rep. Adam Kinzinger, R-Ill., who is retiring at the end of this term, was the sole Republican to vote for the House measure lifting the ceiling.

Could Congress just get rid of the debt ceiling?

Yes, that is a maneuver that has been proposed by Treasury Secretary Janet Yellen. Speaking before the House Financial Services Committee in September, she called the existence of the debt ceiling “destructive.”

“I believe when Congress legislates expenditures and puts in place tax policy that determines taxes, those are the crucial decisions Congress is making,” Yellen said. “And if to finance those spending and tax decisions it is necessary to issue additional debt, I believe it is very destructive to put the president and myself, as treasury secretary, in a situation where we might be unable to pay the bills that result from those past decisions.”

In 2017, former staffers for President Barack Obama and McConnell co-wrote a Wall Street Journal op-ed calling for the debt ceiling’s repeal, saying it “would let the Treasury focus on the most efficient and effective ways to manage the federal government’s cash flow, giving future presidents, both Democratic and Republican, a freer hand. No matter which party holds the White House, all Americans would benefit from taking the threat of a U.S. default off the table.”