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What is a debt ceiling?

You may have heard of the debt ceiling recently – it’s a big topic in the U.S. right now. Let’s take a deep dive into what is going on. 

Let’s start with a short answer: 

Debt ceiling = debt limit 

Explain that further? 

The debt ceiling is the maximum amount of money the U.S. government can borrow to fulfill its financial obligations. The intention of the debt ceiling is to keep the federal government fiscally responsible by regulating spending, and to ensure Congress authorises further borrowing. When the debt ceiling is reached, Congress needs to raise it for the country to continue borrowing. 

When a politician says they want to ‘lift or raise the debt ceiling’, they want to allow for additional borrowing, resulting in a higher level of allowed debt. When a politician says they want to ‘suspend the debt ceiling’, they are referring to having no limit for a temporary period of time.

It’s important to note that if the debt ceiling is lifted, the U.S. government is not allowed to authorise new spending, but only finance what is already approved. 

Why is this in the news? 

Congress needs to pass a funding plan by 30 September to prevent a government shutdown, and the U.S. is expected to hit the debt ceiling sometime in October. 

This week, Congress is arguing whether to raise it or not. All Democrats want to increase the debt limit through legislation to pay for the borrowing that occurred under previous administrations of both parties. However, Republicans say they do not want to lift the debt ceiling, with Senate Minority Leader Mitch McConnell suggesting the Democrats should undertake the task on its own by reorganising their financial strategy.

What happens if the debt ceiling is not raised? 

While the ramifications of the debt ceiling not being raised remain unclear, most people can agree that this is not an ideal situation. Ultimately, if the government cannot pay its bills due to the inability to borrow more money, payments like social security, veteran compensation, pension payments, food assistance and other benefits might all be affected. This is often referred to as a ‘government shutdown’ or ‘government blackout’. The last time there was a government shutdown because of the debt ceiling was in 2013 – and it came only two years after another shutdown in 2011.   

There is also the possibility of the U.S. defaulting on its loans – but that’s a whole other explainer. 

Does Australia have something similar? 

Yes. Well, we used to. Former Prime Minister Kevin Rudd introduced a debt ceiling in 2007, and it was set at $75 billion. Over time, the debt ceiling was raised. By 2013, the Tony Abbot-led government repealed the debt ceiling completely.

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