Biden Signs $2.5 Trillion Debt Limit Extension. Here’s How It Affects You – Forbes Advisor

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Just like you and me, the federal government can run out of money if it doesn’t plan ahead—and like for us, it can lead to dire consequences.

For now, it appears this looming crisis is averted. On Tuesday, Congress voted to raise the debt limit by $2.5 trillion, and President Joe Biden signed the bill into law today.

The amount is expected to pay the Treasury’s bills until sometime in 2023.

It’s been a long and winding path to get to this point. The matter of whether to raise the debt limit has been hotly debated on Capitol Hill for months while Democrats and Republicans debated a full slate of polarizing issues, from government funding to social infrastructure.

But although the idea of ​​the debt ceiling may feel distant from the lives of ordinary Americans, how it’s handled in Washington can easily cascade into your own financial situation.

Here’s what you should know about the recent debate about raising the debt limit.

What Is the Debt Ceiling?

The debt ceiling, or the debt limit, is the amount of money the United States federal government is allowed to borrow in order to pay its bills. Those bills include items like Social Security payments, military and federal employee salaries, and tax refunds. The country also has to pay interest on debt it has already taken out to pay older bills.

If the country doesn’t increase its debt limit, it’s like maxing out a credit card: The bill-paying activity stops, and the government defaults on the financial commitments it has made.

This could mean delays for payments you’re expecting from the government, and it could impact how expensive it is to buy items on credit, the Treasury secretary has warned. A default could also cause turmoil in the stock market, which could affect the value of any investments you have.

Discussion about the debt ceiling can be confusing because government spending—the budget—is often discussed simultaneously. But while they’re connected, they’re two distinct challenges for lawmakers.

“Raising the debt ceiling doesn’t authorize additional spending of taxpayer dollars,” Treasury Secretary Janet Yellen wrote in a Wall Street Journal op-ed last month. “Instead, when we raise the debt ceiling, we’re effectively agreeing to raise the country’s credit card balance.”

Read more: Janet Yellen Is Sounding The Alarm On The Debt Ceiling. Will She Help Prevent A Crisis?

It can be even more confusing because another term you might hear a lot right now is the deficit.

The deficit is different from the national debt. The deficit is what happens when the government spends more money in a fiscal year than it brings in through taxes and other revenue. The national debt is money that gets borrowed to cover deficits, a running tab of what the country owes lenders. The federal government is more than $28 trillion in debt.

When Was the Last Time the Debt Ceiling Was Raised?

Congress voted in 2019 to suspend the debt limit for two years and take on more debt—like the latest situation, the country was approaching the debt limit cap. That period ended on Aug. 1, 2021, and the limit was reapplied.

The Treasury Department was slated to run out of cash in mid-October. The bill that passed on Oct. 12 filled the coffers with an additional $480 billion, but Yellen had most recently warned Congress the Treasury would run out of money around Dec. 15th.

Some Republicans tied their opposition to raising the debt ceiling to their concerns about the Biden administration’s spending plans, but the current debt situation is in a large part due to spending during the Trump administration, including massive tax cuts enacted in 2017.

“Even if the Biden administration hadn’t authorized any spending, we would still need to address the debt ceiling now,” Yellen wrote in her September op-ed.

Hitting the Debt Ceiling—A Problem That Happens a Lot

Whenever the country has approached the debt limit (17 times since 2001), Congress has voted to raise or suspend the debt ceiling.

However, in 2011, the threat of default led to S&P Global Ratings (formerly Standard and Poor’s) downgrading the country’s credit rating. Essentially, the US got marked as less trustworthy to lend to.

Raising the debt limit is usually not a partisan issue that only Democrats or only Republicans support. There’s typically a shared acceptance that lifting the limit is essential to keeping the economy in good working order.

But it’s not always a tidy process.

The one-time lift of the debt ceiling means Congress won’t have to negotiate the issue again prior to the midterm elections in fall 2022. But lawmakers won’t be able to avoid it for too long beyond then—and haggling over the debt ceiling in spring of 2023 could include managing a post-election shift in party power in both chambers.

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