Debt ceiling vs government shutdown: How they’re different and why they matter

Congress faces two massive tasks over the next month: Funding the U.S. government and increasing the debt ceiling.

The two concepts are distinct but often confused, especially when their deadlines are close together as they are in the fall of 2021.

Lawmakers have until the end of this month to fund the government, while Treasury Secretary Janet Yellen has warned that extraordinary measures to stave off the debt limit are likely to run out in October.

Here’s how the two issues differ.

Failure to fund the government results in a shutdown, but failure to increase the debt ceiling would lead to default.

A government shutdown is the result of lawmakers disagreeing over how much to spend on future bills. Budget debates are forward-looking in the sense that they deal with spending that hasn’t been approved.

Republicans and Democrats usually don’t disagree that the federal government should continue to pay to “keep the lights on.” Workers at the Departments of Housing and Urban Development, Education, Interior, Labor, Commerce often have to send home the majority of their workers until Congress approves a new budget.

Where partisan gridlock enters is in attempt by either party to include amendments or partisan priorities into a budgetary bill. It’s almost always those add-ons that politicians feud over with regular government employees serving as collateral damage.

Debates over the debt ceiling are arguments among politicians over whether they should pay for the spending they already authorized. That could include, for example, trillions in Covid-19 relief or a deficit caused by tax cuts.

Debt ceiling debates, in that sense, are backward-looking.

That being said, politicians in the minority will threaten not to pay the parties it owes money and risk a government default to score future concessions from the majority.

Funding the U.S. government is the more frequent, relatively less calamitous hurdle for lawmakers and has a defined deadline.

Each year, Congress must approve a federal budget that will finance the government for the upcoming 12 months. The federal government’s fiscal calendar runs from Oct. 1 to Sept. 30, meaning that a shutdown will occur if lawmakers don’t pass a new budget by the end of this month.

If lawmakers don’t have a budget in place by the time October begins, the government is required to reduce agency activities and stop non-essential operations.

Government shutdowns have been a regular occurrence over the past decade.

Two government shutdowns happened under former President Donald Trump, with the more recent one between December 2018 and January 2019. That 35-day shutdown set a record as the longest in U.S. history and led to some 300,000 federal workers being furloughed.

That shutdown was so severe that it cut gross domestic product by 0.1 percent in the fourth quarter of 2018 and 0.2 percent in the first quarter of 2019, according to analysis from the nonpartisan Congressional Budget Office.

On paper, Democrats and Republicans are actually united in their desire to pass a continuing resolution — a type of appropriations bill — to fund the government.

Senate Minority Leader Mitch McConnell, R-Ky., supports a “clean” resolution, said a person familiar with his thinking. “Clean” bills are free of any amendments or partisan policies and in general allow the government and its thousands of employees to continue work as usual with budgets that Congress has approved in the past.

The problem, however, is that McConnell and his Republican colleagues are resolved not to help Democrats raise or suspend the all-important, but otherwise unrelated, debt ceiling. McConnell would prefer Democrats link a debt ceiling increase to their $3.5 trillion social policy bill, which is being drafted under budget rules that would allow it to pass with just 51 Senate votes and avoids the threat of a GOP filibuster.

Doing so protects his caucus in the 2022 midterm elections and forces Democrats in toss-up races to defend themselves against accusations of wasteful spending.

Democrats, in turn, want to link a debt ceiling increase to a government funding bill in order to paint Republicans responsible for the chaos if the GOP opts to filibuster. Using that method, the bill would require 60 votes in a Senate split 50-50 between Democrats and Republicans.

“Democratic leaders are betting that the GOP will be forced to vote for this package in the face of a potential adverse market reaction and voter backlash,” wrote Solita Marcelli, chief investment officer for the Americas at UBS Global Wealth Management.

“Even if Republicans refuse to supply any votes, and in order to avoid blame, they might choose not to filibuster, letting Democrats pass the CR with only 50 votes,” she added.

A spokesman for House Speaker Nancy Pelosi, D-Calif., referred CNBC to a recent “dear colleague” letter penned by Rep. Steny Hoyer of Maryland, the House majority leader.

“It would be a disaster for our economy and for tens of millions of American families if Republicans refuse to join Democrats in responsibly addressing the debt limit,” Hoyer wrote in the letter dated Sept. 8. “I urge Senator McConnell to stop playing dangerous games with our economy and the well-being of so many Americans.”

As worrying as a government shutdown can be, failure to address the debt ceiling is considered by virtually everyone to be an unequivocal disaster.

The debt ceiling is the amount of debt the U.S. government is legally allowed to carry.

Lawmakers can either vote to increase the borrowing limit to a certain dollar amount or suspend it until a certain date, when the ceiling would be imposed at whatever level the debt is on that day.

A two-year suspension of the debt ceiling that was passed in 2019 expired at the end of July, meaning that the Treasury Department hasn’t been able to issue new bonds to finance prior congressional spending.

But therein lies the problem: The debt ceiling prevents the U.S. government from honoring spending that has already occurred. Increasing or suspending the debt ceiling does not authorize new federal spending but allows Treasury to continue to pay receipts for purchases the government made weeks or months ago.

That hasn’t stopped Republicans from conflating the debt ceiling with Democrats’ uncertain attempts to pass $4.5 trillion in federal spending. Democrats are scrambling to pass a $1 trillion bipartisan infrastructure bill and a $3.5 trillion effort to expand the nation’s safety net opposed by virtually every Republican.

Some members of the GOP argue that voting to increase the debt ceiling is an implicit endorsement of that spending.

The Treasury Department has long likened refusal to increase the debt ceiling to a consumer refusing to pay a credit card bill for purchases he or she made last month.

Unable to float new debt, Treasury has resorted to “extraordinary measures” to pay America’s bills. These temporary measures allow Treasury to conserve cash by halting reinvestments in government retirement funds.

Treasury is expected to exhaust those measures some time in October and reach a “drop-dead” date when the U.S. government would default for the first time. When it runs out of those measures, the U.S. will risk missing payments to Social Security, the military and interest on all its approximate $28 trillion of debt.

Even flirting with a default can have drastic implications for the cost of borrowing for everyday Americans.

“A delay that calls into question the federal government’s ability to meet all its obligations would likely cause irreparable damage to the U.S. economy and global financial markets,” Yellen wrote earlier this month in a letter to Pelosi.

“We have learned from past debt limit impasses that waiting until the last minute to suspend or increase the debt limit can cause serious harm to business and consumer confidence, raise short-term borrowing costs for taxpayers, and negatively impact the credit rating of the United States,” she added.

Republicans, Democrats and economists say the consequences of a default would be catastrophic and likely guarantee a recession.

While missing payments to U.S. troops and Social Security recipients would be bad enough, a default would call into question the nation’s ability to make payments in a timely matter and send interest rates soaring across the economy.