Friday, October 22, 2021

How they differ, why they matter

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The United States Capitol in Washington, DC.

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Congress faces two massive tasks over the next month: funding the United States government and raising the debt ceiling.

The two concepts are different but are often confused, especially when their deadlines are very close, as they are in the fall of 2021.

Lawmakers have until the end of this month to fund the government, while Treasury Secretary Janet Yellen has warned that extraordinary measures to avoid the debt limit are likely to be exhausted in October.

This is how the two themes differ.

Two debates

Failure to fund the government results in a shutdown, but failure to increase the debt ceiling would lead to default.

A government shutdown is the result of lawmakers not agreeing on how much to spend on future bills. Budget discussions are forward-looking in the sense that they deal with expenditures that have not been approved.

Republicans and Democrats do not generally disagree that the federal government should continue to pay to “keep the lights on.” Workers in the Departments of Housing and Urban Development, Education, Interior, Labor, Commerce often have to send most of their workers home until Congress passes a new budget.

Where partisan deadlock enters, either party tries to include partisan amendments or priorities in a budget bill. It’s almost always those add-ons that politicians fight over with regular government employees that serve as collateral damage.

Debt ceiling debates are discussions between politicians about whether they should pay the spending they have already authorized. That could include, for example, trillions in Covid-19 relief or a shortfall caused by tax cuts.

Debates on the debt ceiling, in that sense, are retrospective.

That said, minority politicians will not threaten to pay the parties to whom they owe money and will risk a government default to obtain future concessions from the majority.

Financing the United States government is the most frequent and relatively less dire hurdle for legislators and has a definite deadline.

Government financing

CNBC policy

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That shutdown was so severe that it reduced gross domestic product by 0.1 percent in the fourth quarter of 2018 and by 0.2 percent in the first quarter of 2019, according to an analysis by the nonpartisan Congressional Budget Office.

On paper, Democrats and Republicans are truly united in their desire to pass an ongoing resolution, a type of appropriations bill, to fund the government.

Senate Minority Leader Mitch McConnell, R-Kentucky, supports a “clean” resolution, said a person familiar with his thinking. The “clean” bills are free of amendments or partisan policies and generally allow the government and its thousands of employees to continue working as usual with budgets that Congress passed in the past.

The problem, however, is that McConnell and his Republican colleagues are determined not to help Democrats raise or suspend the debt ceiling, which is all-important but otherwise unrelated. McConnell would prefer Democrats to link an increase in the debt ceiling to his $ 3.5 trillion social policy bill, which is being drafted under budget rules that would allow it to pass with just 51 Senate votes and avoid the threat of obstructionism. republican.

Doing so protects your caucus in the 2022 midterm elections and forces Democrats to compete with each other to defend themselves against charges of waste.

Democrats, in turn, want to link an increase in the debt ceiling to a government funding bill to paint Republicans responsible for chaos if the Republican Party opts for filibuster. Using that method, the bill would require 60 votes in a Senate split 50-50 between Democrats and Republicans.

“Democratic leaders are betting that the Republican Party will be forced to vote for this package in the face of potential market backlash and voter backlash,” wrote Solita Marcelli, Americas chief investment officer at UBS Global Wealth Management. .

Senate Minority Leader Mitch McConnell (R-KY) speaks to the media after the Senate Republican Policy Luncheon on Capitol Hill in Washington on June 22, 2021.

Joshua Roberts | Reuters

“Even if Republicans refuse to provide votes, and to avoid blame, they could choose not to obstruct, leaving Democrats to pass the CR with just 50 votes,” he added.

A spokesperson for House Speaker Nancy Pelosi, Democrat of California, referred CNBC to a recent “dear colleague” letter written by Representative Steny Hoyer of Maryland, the House Majority Leader.

“It would be a disaster for our economy and for tens of millions of American families if Republicans refuse to join with Democrats in responsibly addressing the debt limit,” Hoyer wrote in the Sept. 8 letter. “I urge Senator McConnell to stop playing dangerous games with our economy and the well-being of so many Americans.”

The debt ceiling

As disturbing as the government shutdown may be, virtually everyone considers failure to address the debt ceiling to be an unequivocal disaster.

The debt ceiling is the amount of debt that the US government is legally authorized to assume.

Legislators can vote to raise the debt limit to a certain dollar amount or suspend it until a certain date, when the maximum limit would be imposed on the level of debt on that day.

A two-year suspension of the debt ceiling that was approved in 2019 expired at the end of July, meaning the Treasury Department has been unable to issue new bonds to fund previous Congressional spending.

But therein lies the problem: the debt ceiling prevents the United States government from honoring the expenditures that have already been made. Raising or suspending the debt ceiling does not authorize new federal spending, but it does allow the Treasury to continue paying receipts for purchases the government made weeks or months ago.

United States Secretary of the Treasury Janet Yellen answers questions during the Senate Appropriations Subcommittee hearing to examine the Fiscal Year 22 budget request for the Treasury Department on Capitol Hill in Washington, DC on June 23. of 2021.

Greg Nash | Swimming pool | Reuters

That hasn’t stopped Republicans from combining the debt ceiling with uncertain attempts by Democrats to spend $ 4.5 trillion on federal spending. Democrats are fighting to pass a $ 1 trillion bipartisan infrastructure bill and a $ 3.5 trillion effort to expand the nation’s safety net that virtually all Republicans oppose.

Some members of the Republican Party argue that voting to raise the debt ceiling is an implicit endorsement of that spending.

The Treasury Department has long compared a refusal to raise the debt limit to a consumer refusing to pay a credit card bill for purchases they made last month.

Unable to float new debt, the Treasury has resorted to “extraordinary measures” to pay America’s bills. These temporary measures allow the Treasury to conserve cash by stopping reinvestments in government retirement funds.

The Treasury is expected to exhaust those measures sometime in October and reach a deadline by which the US government will default for the first time. When those measures are exhausted, the United States will risk failing to make payments to Social Security, the military, and interest on all of its roughly $ 28 trillion of debt.

Even flirting with a default can have drastic implications for the cost of borrowing for ordinary Americans.

“A delay that calls into question the ability of the federal government to meet all of its obligations would likely cause irreparable damage to the US economy and global financial markets,” Yellen wrote earlier this month in a letter to Pelosi.

“We have learned from past impasses on debt limits that waiting until the last minute to suspend or increase the debt limit can cause serious damage to business and consumer confidence, increase the costs of short-term loans for taxpayers and adversely affect the credit rating of the United States. States, “he added.

Republicans, Democrats and economists say the consequences of a default would be catastrophic and likely guarantee a recession.

While failure to make payments to U.S. troops and Social Security recipients would be bad enough, a default would put the nation’s ability to make timely payments into question and lead to skyrocketing interest rates across the country. the whole economy.

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