Here’s an over simplified explanation of the Debt Ceiling in under a minute
- The US government spends money on programs and has to make money through taxes.
- Each year, Congress decides how much to spend and how much it can make. This is the federal budget.
- Most of the time, Congress creates a budget where it spends more money than it can make. This forces the U.S. Treasury to borrow money, putting the government into debt.
- A third of the money is borrowed from US citizens and companies - we invest by buying U.S. bonds, which are like loans to the government, and the U.S. pays us back with interest.
- Another third of US debt is owned by foreign governments.
- And the last third of debt is owed to the federal government - that’s right, the US government borrows money from itself to pay for itself - it’s too complicated to explain here.
- The debt ceiling is the max amount Congress lets the Treasury borrow, kinda like a credit card limit.
- But since Congress often sets budgets that forces more borrowing, Congress just raises that borrowing limit.
- But the problem is that setting the budget and raising the debt limit are 2 separate decisions.
- So Congress will vote to approve a budget that requires the debt ceiling to be raised. But one party won’t vote to raise the debt limit unless certain demands are met.
- So this second vote is used as a political bargaining tool.
- If the debt ceiling isn’t raised, the US can’t borrow money to both spend and pay back its debts. This results in agencies shutting down, people not getting paid, countries and companies pulling their money out of the US, and triggering a global recession.
