Understanding the debt ceiling

Republicans and Democrats square off over spending

The United States could run out of money to pay its bills as soon as June 1, according to the Treasury Department, if Congress does not lift the country’s $31.4 trillion borrowing limit. Failure to act could trigger an unprecedented default, which economists say could rattle financial markets and push the country into a recession.

Republicans who control the House of Representatives have insisted that any increase in national borrowing authority must include limits on federal spending. Here’s a look at how the U.S. government raises and spends money.

Turn of the century surplus

A booming economy and a budget deal that hiked taxes and limited spending in the 1990s led to budget surpluses by the end of the decade.

Goodbye to balanced budgets

But they quickly evaporated as the dot-com bubble burst, the Republican President George W. Bush cut taxes, and the United States launched expensive wars in Iraq and Afghanistan.

The Great Recession

The housing bubble burst and unemployment spiked, causing tax revenue to plunge. Bush and his successor, Democratic President Barack Obama, signed off on stimulus packages to boost the economy.

Spending caps

Republicans pushed for spending cuts during a debt-ceiling showdown in 2011. The resulting compromise – the Budget Control Act - kept spending in check for much of the following decade. Revenue fell following Republican President Donald Trump’s tax cuts.

COVID-19

Republicans and Democrats signed off on more than $6 trillion to fight the pandemic and prop up the economy. Annual budget deficits widened dramatically.

Though spending is due to subside in coming years as COVID-19 relief efforts recede, the United States isn't likely to return to balanced budgets any time soon.

Where the money goes

Republicans say they will only support spending restraints, not tax hikes, to get the budget under control. Following is a look at how the government spends its money.

Benefits and other “mandatory” spending

Benefit programs like Social Security and Medicare account for the largest category of the budget, and they are projected to grow dramatically as the population ages. In order to limit these popular programs, lawmakers would have to make politically difficult choices like raising the retirement age or scaling back payments to hospitals. Neither party has shown a willingness to tackle this problem.

Domestic discretionary spending

Congress sets spending levels each year for domestic agencies like the Food and Drug Administration and the Transportation Department. Much of that money is sent to states to administer.

Defense spending

Defense-related spending, also set annually by Congress, is roughly equal to domestic spending. Republicans have traditionally advocated for a robust military budget.

Net interest

Net interest on previously borrowed money represents a significant chunk of U.S. government spending. These borrowing costs could spike in coming years as the Federal Reserve raises interest rates to fight inflation.

House Republican Speaker Kevin McCarthy and Democratic President Joe Biden have both ruled out cuts to Social Security and Medicare, and Republicans have also pushed for an increase in defense spending. Democrats oppose new restrictions for antipoverty programs. Whatever solution emerges is not likely to make a significant dent in the country’s long-term fiscal problems.

Sources

Congressional Budget Office; Office of Management and Budget; Reuters reporting

Edited by

Matt Weber, Scott Malone