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The U.S. government could both shut down and default on its debt within the next month

September 21, 2021, 12:30 PM UTC

Over the next few weeks, federal lawmakers in Washington have some increasingly important deadlines looming: approve the federal budget and raise the country’s debt ceiling. 

First up, the federal budget expires in 10 days. The U.S. government’s fiscal year runs from Oct. 1 to Sept. 30. If Congress doesn’t have a budget in place by Oct. 1 or pass a continuing resolution, the federal government will shut down. 

When shutdowns happen—as they have more frequently in recent years—nonessential government workers and contractors are typically furloughed. The longest shutdown, 35 days, started in December 2018 under President Donald Trump. Roughly 300,000 federal employees were out of work, and the closure lowered projected real GDP in the first quarter of 2019 by 0.2%

The second deadline is the debt ceiling. The U.S. is rapidly approaching its borrowing limit, with Treasury Secretary Janet Yellen estimating that the U.S. will run out of cash to pay its bills. If Congress doesn’t act, it could “precipitate a historic financial crisis” and risk “widespread economic catastrophe,” Yellen has said. Here’s what you should know.

What is the debt ceiling?

The debt ceiling is essentially the limit on how much Congress can borrow. Think of it as the credit limit on a credit card. Raising the debt ceiling doesn’t authorize new spending, it simply gives the Treasury room to borrow to pay the bills—and it’s fairly common. Congress has raised the debt limit nearly 100 times since World War II

Once the total U.S. debt hits the limit, the government can’t issue any more debt and must rely on the cash it has on hand. As President Obama succinctly put it in 2013 during a previous political skirmish over the debt ceiling, “If we don’t raise the debt ceiling, we’re deadbeats.”

The U.S. reached that limit in August, when the previous suspension (put in place in 2019) ended and the ceiling resumed at the current debt level, which is about $28.5 trillion.

Since then, the Treasury Department has been moving money around to try to cover its obligations, a process that’s called “extraordinary measures.” This includes temporarily forgoing paying federal workers’ pensions.

But this is only a short-term fix. Yellen estimates that the Treasury will run out of money sometime in October. And once that happens, the U.S. would need to make tough calls on who gets paid with the money available. It could start defaulting on various payments, including to state governments, Social Security recipients, college loans, and bond holders. 

Why the debt ceiling and the federal budget are being talked about together

The federal budget and the debt ceiling are two different and essentially unrelated issues. The reason the public is hearing about them in the same conversation is because of how lawmakers plan to solve them

Democrats and Republicans have previously expressed support for a simple continuing resolution to fund the government and avoid a shutdown. That move would allow the government to remain afloat while Democrats finalize their proposed $3.5 trillion budget proposal. 

But Democrats are aiming to attach a proviso onto that continuing resolution legislation that would also raise the debt limit through December 2022. Kill two birds with one stone, so to speak, and thus linking the two issues. 

But Senate Minority Leader Mitch McConnell (R-Ky.) has repeatedly said Republicans would not help Democrats raise the debt ceiling. Instead, he wants Democrats to include raising the debt ceiling in the budget package. Yet House Speaker Nancy Pelosi (D-Calif.) and other Democratic leaders have opposed that option. And based on the current pace of negotiations, the budget vote may not even happen until November or December—long after the Treasury is expected to run out of cash. 

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