Why is the raising of the debt limit important?
The federal government now must borrow about 40 cents for every dollar it spends. Without congressional action by today to raise the debt limit, the Treasury would no longer be able to borrow and thus would not be able to pay all its bills. The White House has said that the government sends out 80 million checks a month to Social Security recipients, veterans, and people on disability, in addition to paying federal workers, contractors and military personnel. In addition, a borrowing default would almost surely drive up interest rates, making it more expensive to obtain mortgage or education loans, and push stock prices down, eating away at investments and retirement funds.
How long will the government be able to continue borrowing under this plan?
The current debt ceiling is $14.3 trillion. Under the compromise, that would initially rise by $900 billion. It would later go up by another $1.2 trillion to $1.5 trillion. The amount would depend on the level of new deficit reduction measures that a special joint congressional committee is to come up with by Thanksgiving and Congress must vote on by the end of the year. The $2.1 trillion to $2.4 trillion increase would be enough to get the government through next year's presidential election without Congress and the president having to raise it again.
What are the immediate effects of the spending cuts?
Probably not that much. Americans are already feeling the pinch from the federal government's new austerity mood. The compromise calls for initial cuts of more than $900 billion in federal agency budgets, but that's phased in over 10 years with the bigger cuts coming later in the decade. The Congressional Budget Office says that for next year the cuts would amount to only $21 billion out of total spending exceeding $3.6 trillion.
What happens next?
A 12-member special congressional committee, made up of three Republicans and three Democrats from each chamber, is supposed to write a bill by Thanksgiving for reducing deficits by another $1.5 trillion over the next 10 years. The House and Senate would then vote yes or no by Dec. 23 on the special committee's recommendations, but can't change them. The committee could get the savings by changing entitlement programs like Medicare and Social Security as well as tax law. If the committee fails to come up with a plan, or it is rejected by Congress, an additional $1.2 trillion in spending cuts would automatically go into effect from 2013. Those cuts would be divided equally between defense and nondefense programs. Social Security, Medicaid and unemployment insurance programs would be exempted from automatic cuts. Any cuts to Medicare would fall on providers, not beneficiaries.