Debt ceiling Q&A;: How did we get here, what happens next?

Question: The federal government has run through its ability to borrow money and soon will run out of cash to pay its bills. How did the government get into this problem?

Answer: As recently as the final years of the Clinton administration, the federal government was running a sizable budget surplus, and the national debt was declining relative to the size of the U.S. economy. Then several things happened: Under President George W. Bush, Congress enacted two big tax cuts, in 2001 and 2003, which cut federal revenues. Under Bush, the country also adopted an expensive new prescription drug plan for senior citizens and pursued wars in Iraq and Afghanistan, all of which raised the government’s expenses. The combination led to increasing deficits and, as the government borrowed money to cover those deficits, a rapid increase in the national debt. Then came the recession, which cut tax revenues further and pushed up expenses even more for things like unemployment insurance and President Obama’s economic stimulus plan. Now, the debt has hit the statutory limit of $14.3 trillion.

Q: What happens if the debt limit is not increased?

A: The government won’t have the money to pay all its bills. Tax revenue will continue to flow in but will cover only about 55%-60% of the government’s daily obligations. The possibility of the government not paying its bills — defaulting — could dramatically unsettle financial markets and lead to a rapid increase in interest rates for mortgages, consumer loans and the government, financial experts have warned.


Q: How soon will the government run short?

A: No one knows for sure. Much depends on the pace at which tax revenues come in. The Treasury Department has said Aug. 2 is the last day on which it can be sure of having enough money. The Treasury is scheduled to make $23 billion in Social Security payments on Aug. 3, which could be a major hurdle. Outside budget experts say that if the Treasury gets past that payment, it might be able to scrape by for another week, assuming markets remain calm.

Q: What sort of payments are we talking about?

A: When people think of the federal government, the image in mind tends to be the well-known government departments and agencies — State, Defense, the FBI, EPA and the like. But those agencies make up only a fraction of federal spending. The salaries of every federal government civilian worker — from the president down to the clerk at the Social Security office — totaled together come to only about 5% of federal spending.

For the lion’s share of what the federal government does, think of a huge machine that takes in tax revenue and puts out tens of millions of checks to individuals. These are often called “transfer payments” because they transfer money from one group to another. Some transfer payments go to children and some to working-age adults for things like unemployment. But the bulk go to retirees for Social Security, Medicare, veterans benefits and other programs.

Q: If the government can’t pay all its bills, who would get paid?

A: Officials have not yet said, but the administration is expected to announce its standby plans in the next few days. The top priority is expected to be to pay the interest owed to bondholders — about $29 billion in August — because failure to do that would destroy the nation’s credit rating. After that, the government may simply pay bills in the order in which they are due, to the extent that cash is available.

Q: What about the Social Security Trust Fund? Can’t that be used to pay Social Security benefits?


A: No. The government will continue to collect Social Security taxes, but the taxes flow in across the month, while the checks go out at the beginning of the month. Normally, the Treasury advances money to Social Security at the start of each month to pay that month’s checks, then gets repaid as the tax money comes in. But the Treasury can’t make that advance if it doesn’t have cash. And while the Social Security Trust Fund has more than $2.5 trillion in assets, that money is invested in U.S. government securities. Usually, that’s a good thing because U.S. government securities are considered the world’s safest investment. In this case, it’s a problem because if the government doesn’t have money, it can’t cash in the securities.

Q: Could the president just order bills to be paid even if Congress hasn’t raised the debt ceiling?

A: Various people have floated ideas for how the president could bypass the debt-ceiling law, but White House officials have said none of those proposals pass legal muster.

Q: Congress has been trying for weeks to pass an increase in the debt ceiling. Why wasn’t it this hard in previous years?


A: Actually, it’s often been hard. In the late 1980s Congress had so much trouble passing increases in the debt ceiling that the House adopted a rule allowing the ceiling to be raised without a vote. That rule was in effect for years. During the Reagan administration, Congress also balked. The problem is always harder when government is divided between the two parties. And it’s more politically unpopular when the economy is bad. The effort is particularly hard now because the level of debt has risen so high.