1. ITV Report

Q&A: What is the US debt ceiling?

US lawmakers are in negotiations to raise the debt ceiling ahead of a deadline on Thursday. Photo: Olivier Douliery/ABACA USA/Empics Entertainment

Barack Obama is in negotiations with US lawmakers to raise the debt ceiling ahead of a deadline on Thursday. But what is the 'debt ceiling' and why does it matter?

  • What is the debt ceiling?

Like in the UK, the US government is running a budget deficit, which means that it spends more than it brings in from taxes and other revenues.

The US Treasury borrows money to make up the shortfall, but since 1939 there has been a limit on the amount it can borrow.

Congress must give its permission to the US Treasury to go above this so-called "debt ceiling". The current debt ceiling is $16.7 trillion.

  • Why doesn't President Obama raise the debt ceiling?

Some constitutional lawyers argue he has the power to do this on his own but this would be a politically explosive step.

Instead, the two bodies that make up Congress - the Senate and House of Representatives - must decide to raise the limit.

  • How did we get here?

Rises to the debt ceiling have normally been achieved without any problems. Recently, both of the main US political parties - the Republicans and Democrats - have used the debt ceiling as a way of haggling to get their way on other issues.

This time, the Republicans have tried to use it to overturn the government's healthcare bill, known as "Obamacare".

The Republican-controlled House of Representatives have sought to extract concessions on the bill, which have been rejected by the Democrat-dominated Senate.

US President Barack Obama. Credit: REUTERS/Kevin Lamarque
  • What will happen on Thursday?

The US Treasury’s mandate to borrow runs out on Thursday. It still has about $30 billion in cash which will keep it ticking over for around 10 days.

No-one knows what will happen if an agreement is not reached before then, since Congress has always negotiated a rise to the debt ceiling before the cash runs out.

It is likely that the Treasury will continue trying to pay its bills, possibly my a mixture of spending cuts and tax rises.

If the deadlock persists there is a risk the US government could default on interest payments on the debt it owes and also fail to repay some loans as they become due. This is known as a default.

  • What will the impact be on the rest of the world?

The Treasury borrows money by issuing bonds. US government bonds are seen as one of world's safest investments.

Lenders hate even the threat of defaults, and an unprecedented US government default would send a signal that its bonds are no longer safe. This would send shockwaves through the global economy.

Credit markets could freeze, the value of the dollar could plummet, US interest rates could skyrocket, the negative spillovers could reverberate around the world, and there might be a financial crisis and recession that could echo the events of 2008 or worse.

  • Haven't we been here before?

In August 2011, Congress found itself at an impasse over raising the debt ceiling. Just two days before a threatened default, it passed legislation to raise the ceiling by at least $2.1 trillion in exchange for a package of cuts to government spending.

The debt ceiling has been raised almost 80 times since 1960, according to the US Treasury.