Q&A: Why has the US not agreed a new debt ceiling?

The White House and Congress are fighting over how to raise the debt ceiling.

With the deadline for reaching a deal fast approaching, the fear is that the US will run out of money.

What is the debt ceiling?

The US government faces a legal limit on the total amount of debts it can run up in order to pay its bills - including military salaries, interest on existing loans, and Medicare. The current limit is $14.3 trillion (£8.9tn).
The cap was reached in May. Treasury Secretary Timothy Geithner was able to extend the expected day of reckoning to 2 August, by various tricks such as postponing payments into government pension schemes, and thanks to better-than-expected tax revenues.
Republicans, and some analysts, say that even after 2 August, the government has some leeway to continue meeting payments at least for a few more days.

Why can't the Obama administration borrow more?

Because it is not in their power. All government borrowing has to be approved, under the US Constitution, by Congress.
An overall borrowing cap was first introduced by Congress in 1917 to make it simpler for the government to finance its efforts in World War I.
Since then the ceiling has been raised dozens of times, and it is usually a formality.
Perversely, Congress also sets the government's spending commitments and tax-raising powers.
This puts the Obama administration in the impossible position of being required to spend more than it earns, while also being prevented from borrowing the difference.

What is the problem this time round?

The financial crisis and the US's fragile economic condition have caused government spending to soar, while tax revenues have suffered.
This has caused a big rise in the government's deficit - its rate of borrowing.
The Republicans, who control the House of Representatives, say they want to bring the deficit back under control, and have threatened not to raise the debt ceiling unless a deal is reached.

How far apart are the two sides?

Both sides accept that cutting the deficit is vital.
The Democrats' solution is to cut spending over the next 10 years by $3tn and raise taxes by about $1tn.
The Republicans, who have a majority in the House of Representatives, oppose tax rises and want bigger spending cuts.
The Republicans have agreed to military spending cuts, and have offered to increase tax revenues by removing loopholes.
Democrats have agreed to limit the way social-security payments increase with inflation and to raise the age at which people can claim Medicare from 65 to 67.
However, Republicans still want to cap the top rate of income tax and to repeal parts of President Obama's healthcare reforms - demands unacceptable to the Democrats.

What happens if no deal is reached by 2 August?

For the first time ever the US could be in default, something Tim Geithner has said would be "catastrophic", and President Obama has warned could tip America back into recession.
Exactly what would happen is unclear. But President Obama's options may include:

1. Stopping payments across the board, including debt repayments. This would be a disastrous outcome for financial markets.
2. Prioritising some payments (particularly interest payments), at least until money completely runs out. Some $49bn of social security payments due on 3 August could in theory be delayed. But these payments are computer-automated and may be technically impossible to stop. Moreover, stopping them would hurt core Democrat voters. And it is not even clear the government has the legal right to prioritise payments like this anyway.
3. Ignoring the debt ceiling and continuing borrowing. Some have argued that the US Constitution gives the president authority to do this. It would certainly spark a constitutional crisis, and possibly impeachment proceedings.

Surely the US would not default on its debts?

So far that has been everyone's assumption.
The US has not seen any significant increase in its borrowing cost, in the way that Greece and other indebted eurozone governments have.
The rating agencies are somewhat less relaxed. On 15 July, Standard & Poor's warned it could cut the US's coveted AAA credit rating if no deal is done, which could limit some investors' ability to lend to the US government.
Moreover, some analysts point out that a surprisingly large amount of existing debt comes up for repayment in 2011 - some $1.7bn, or 12% of its total debt.
They fear that investors could panic and refuse to relend the money, forcing a default.

Is there a compromise to be agreed?

Republicans have proposed raising the debt ceiling by enough to fund the government for another six to eight months, to allow more time for negotiations.
Mr Geithner opposes this extension, which would set the new deadline in the run-up to the 2012 presidential elections.
Other Democrats have backed a longer extension.
It could be brinkmanship, but both parties agree that talks on a new ceiling cannot go on indefinitely.

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