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US Treasury to hit debt limit by October. What if pols can't reach a deal?

Republicans and Democrats appear light-years apart on an agreement to raise the national debt limit, which the US could hit by mid-October. That leaves just weeks to move each side off its opening stance.

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The Capitol is seen after final votes were cast and members of Congress departed for a five-week recess, in Washington, Friday, Aug. 2, 2013. With few accomplishments in the divided 113th Congress, the next big battle is over the budget. Politicians appear light-years apart on an agreement to raise the national debt limit, which the US could hit by mid-October.

J. Scott Applewhite/AP

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The dynamics of the partisan rift over budget matters have suddenly changed, gaining new urgency thanks to a determination by the US Treasury that it will run up against its borrowing limit by mid-October.

That’s coming up quickly, moving debate over this Congress-imposed cap on the national debt onto the legislative calendar right alongside a parallel debate in Congress about approving a budget for the new fiscal year that starts Oct. 1.

Right now, Republicans and Democrats appear light-years apart. Many conservative lawmakers are pushing to link a hike in the debt limit with plans for new spending cuts.

President Obama says raising the borrowing cap is simply a matter of allowing already-approved federal spending to occur – not something that should become a bargaining chip in budget talks.

What if Republicans and Democrats can’t agree on a debt-limit hike?

According to Treasury Secretary Jacob Lew, the government would run up against the current ceiling – a national debt of $16.7 trillion.

The economic implications are large.

Failure to raise the debt ceiling could throw the US government into a position of being unable to meet its financial obligations – a position that many investors would view as a debt default. It could prompt a credit-rating downgrade. It would affect millions of Americans as routine payments for things like military salaries or Medicare stalled or slowed.

And beyond that, a debt-limit impasse could slow an already tepid economic recovery by damaging the confidence of businesses, investors, and consumers.

Some of this is known because we’ve seen the movie before.

The last time the US ran up to the borrowing limit was in 2011. Congress raised the cap, but only after going so close to the brink of default that Standard & Poor's downgraded the government's debt.

The stock market showed significant jitters, and consumer confidence took a big hit.

That was all without any actual failure to raise the cap.

A debt downgrade, in effect, makes Treasury borrowing more expensive because investors view government bonds as riskier. And in the 2011 case, the doubts were about political will of a divided Congress, not about fundamental capacity of the US economy to fund government debts.

This time around, as last time, many Republicans in Congress view the debt limit as a bargaining chip. At a time when the national debt is already sky high, they argue, the cap should be raised only in tandem with significant moves toward future fiscal discipline.

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