Federal Budgets, Continuing Resolutions and the Debt Ceiling Explained

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–Jeff Myhre

Texas Senator Ted Cruz
Texas Senator Ted Cruz

Once again, America’s political leaders are about to threaten the stability of the global financial system.

Every country has a budget, and America’s runs from October 1 of one year to September 30 of the next. In theory, Congress must pass 13 or so appropriations bills before October 1, which the president must sign or veto. If he vetoes, Congress must either override the veto with 2/3 majorities in both the House and the Senate, or come up with bills he will sign. From my knowledge of American Politics, I don’t recall the last time the 13 bills passed on time.

Instead, Congress will usually wait until the last minute and pass an Omnibus Spending bill, basically making those 13 bills into one. No one likes doing that, and while constitutional, it does take some flexibility away in hammering out compromises.

But this time around, Congress won’t have passed a budget in any form by October 1. So, Congress will consider passing a “continuing resolution,” or CR as it is known in Washington circles This means that the government will spend money in October exactly the same way it did in September, thus, continuing the spending levels previously set. This buys time for Congress and the White House to actually pass a proper budget later.

So, what’s the big deal this time? The Republican-controlled House of Representatives has passed a CR, but not exactly. The CR it has passed prevents the government from spending a penny on implementing the Affordable Care Act (“Obamacare”), which would provide health insurance to millions. Texas Senator Ted Cruz has taken the lead in arguing that the ACA needs defunding no matter what the cost. I won’t bother getting into the rights and wrongs of the ACA (I like it, but I don’t love it). Instead, we’ll keep this political. The Democrats control the Senate, and they like the ACA. They will pass a CR that does fund it. And so, the two chambers will have to make a deal.

However, many on the right who hate Mr. Obama in the House (yes, HATE), would rather not pass any CR than pass one with his hallmark legislation funded. If no CR gets passed, the US government cannot spend any money. No Social Security checks, no disbursements to the states, no money for food inspectors. Of course, Congress will still get paid. Interesting, that bit, isn’t it?

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Presuming some kind of deal can be made, though, there is another issue. Unlike every other developed nation in the world, the US Treasury is limited by law as to the amount of debt it can issue – the debt ceiling. Congress passes spending laws (either by budget or CR), so it has already approved the spending, the expenditure has been authorized. But when tax revenues don’t reach the level of spending approved, the government borrows money (sells US Treasury Notes, Bills and Bonds – which are the most sought after financial instrument in the world because of their perceived security).

But America has issued as much debt, almost, as the ceiling allows. So, there are only a handful of solutions. Raise taxes quickly enough to avoiding having to issue debt and/or cut spending to bring about revenue and expenditure balance. We’re talking about a matter of days here – it simply can’t be done. Or you could raise the debt ceiling to permit the issuance of more debt. Or – America can refuse to pay on the debt it has already issued, “default.”

Now, if America defaults on its debt – well, it would be bad. Everyone who holds US debt would sell it if they could, driving down the price of the bonds. And the way bonds work, if the price falls, interest rates go up. America’s Federal Reserve has tried to keep interest rates at near zero since the 2008 crash to help the economy. Rising interest rates will increase unemployment, reducing corporate profits and all kinds of other bad stuff.

So why would Congress not raise the debt ceiling? Because some members in the House hate the ACA and Mr. Obama. They plan on forcing a defunding in exchange for raising the debt ceiling and hopefully this will not happen.

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