US debt ceiling

What does it mean to raise the US debt limit? Although the fiscal year runs from October to September, the government makes its calculations in projections or estimates of how much money it expects to receive in the year and how much it will spend. As you can imagine, neither of the two, income or expenses, are one-time or a month, they are divided into 12 months, with some months more than others.

That is why to keep the Government working, they issue what are called notes, which are types of loans that they take from investors and are paid as income is generated. During the year, something common in many governments, they exceed expenses and need to borrow, more than budgeted. For this, they need the approval of Congress, as established by the Constitution. This is done, because, the budget is set and approved by both branches, Executive and Legislative so, any change in it, must be approved by both branches. So far it is like a typical home, income expenses are exceeded, and you must borrow.

The last time this happened was when the pandemic happened because a lot of money was used to keep the economy running. How does it affect you, if an agreement is not reached? The government might not have the money to pay all its obligations and would have to choose which ones it would pay for and which it would not. These debts are salaries of federal employees, veterans, disabled, social security, payments to suppliers, and debt. On a personal level, it could be affected if you depend on some of these payments. If you are a contractor, you could be affected because payments can be late. If your business has customers who are affected, you could be affected because the purchasing power of your clients will decrease or get late depending on when they are paid. Also, if I know I will have my salary later, I may hold my expenses just for basic needs and hold other expenses. If the government is then going to borrow, the interest would be higher because it is no longer such a safe debt for having defaulted on payments. Then, future notes will cost more because the Government will need to pay more interest on them to attract investors.

Notice that I speak in the future and say could, why? Not because there seems to be agreement, it's because this is a political game. Republicans have a key piece of the game, and they want some of their policies implemented and they have to negotiate. The Congress is divided, with Democrats in the Senate and Republicans in the House of Representatives. The budget process begins with the Executive Branch presenting the needs and income and expenses projections. Then Congress approves or disapproves the budget. When both versions are reconciled it is signed by the President and turns in the working paper for the Federal Government to operate.

So, any changes in that final budget need to be approved by the Senate, House, and President to be enacted. Then, as there are different political parties involved, each will present their priorities and negotiate which will be the final version. In the current situation, they will negotiate how much will be increased and the use of those funds. Any party that allows non-payment is going to look bad. I come back and say, I do not think the default will materialize, but we must remain aware.

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