The US government faces a legal limit on the total amount of debts it can run up in order to pay its bills - including military salaries, interest on existing loans and Medicare.
The current limit is $US14.3 trillion ($A13.1 trillion) and it was exceeded on May 16.
DEBT CEILING EXCEEDED
Treasury Secretary Timothy Geithner was able to extend the expected day of reckoning to August 2, by various means, such as postponing payments into government pension schemes, and thanks to better-than-expected tax revenues.
But according to the US Treasury: "Failing to increase the debt limit would... cause the government to default on its legal obligations – an unprecedented event in American history".
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THE DEBT CEILING DEBATE
Congress is now considering whether, and by how much, to extend the debt ceiling, or eliminate it, and what long-term policy changes should be made concurrently.
As of May 2011, the federal government borrowed approximately 40 cents out of every dollar -- or 40 per cent -- it spends. Raising the debt ceiling would allow the federal government to continue to borrow money to support these spending levels.
If the debt ceiling is not raised, the federal government would have to immediately and significantly cut spending which would impact daily operations of the government and could impact payments such as Social Security benefits, Medicare benefits, military salaries, and interest for the national debt.
RISKS OF 'DEFAULT'
A default is the failure to pay back a loan. The failure to extend the limit may leave the federal government unable to pay all its obligations, including paying interest on existing debt -- a default that could have serious repercussions. This would probably include causing panic in bond markets and damaging the economic recovery.
THE DEBATE OVER DEBT CEILING
Both sides of politics accept that cutting the deficit is vital, with the main point of difference being that the Democrats believe increasing tax would be necessary.
Republicans, who control the House of Representatives, have refused to raise the debt ceiling without deficit reduction, voting down a 'clean' raise in the House. The Republicans largely believe a deficit reduction deal should be based solely on spending cuts, without any tax increases, to reduce or solve the long term issue of debt.
Obama and the Democrats in the US Congress want an increase in the debt ceiling to solve the short-term borrowing problem, and in exchange support a decrease in the budget deficit to be funded by a combination of spending cuts and revenue increases. Democrats have agreed to limit the way social-security payments increase with inflation and to raise the age at which people can claim Medicare from 65 to 67.
However, Republicans still want to cap the top rate of income tax and to repeal parts of President Obama's healthcare reforms - demands unacceptable to the Democrats. Some Republicans are sceptical about raising the debt ceiling altogether, with some suggesting the consequences of default are exaggerated.
WHY CAN'T THE US BORROW MORE?
All government borrowing has to be approved, under the US Constitution, by Congress. An overall borrowing cap was first introduced by Congress in 1917 to make it simpler for the government to finance its efforts in World War I. Since then the ceiling has been raised dozens of times and it is usually a formality.
PROPOSED PLANS
Here is a look at the proposed plans being currently debated in Congress, as outlined by CNN.
THE REID PLAN
Senate Majority Leader Harry Reid (Democratic) from Nevada, outlined a blueprint calling for roughly $US2.7 trillion in spending cuts over the next decade while raising the debt limit by $US2.4 trillion. Reid's plan would not require any new tax increases or reforms to politically popular entitlement programs such as Medicare, Medicaid and Social Security.
With that, Reid is making a major concession to Republicans, who have sharply resisted increases in taxes or other revenues. Bit critics of the plan say the spending cuts in the Reid plan are not substantive enough and they would not truly cut how Congress spends.
THE BOEHNER PLAN
House Republicans, led by Speaker John Boehner, unveiled their deficit reduction/debt ceiling bill on Monday. The Boehner plan would raise the debt ceiling in two steps:
Step 1: Raise the debt ceiling now by about $US1 trillion and pass immediate, discretionary spending cuts of $US1.2 trillion. That's $US1.2 trillion over 10 years.
Step 2: Hold a second vote next year when that $US1 trillion extension runs out. The second vote would raise the debt ceiling another $US1.6 trillion but would be contingent on a new joint committee of Congress. The debt ceiling would go up if both chambers pass the committee's proposal and it is enacted. The Boehner plan would also set up spending caps to limit future government spending.
THE 'KICK THE CAN' SHORT-TERM DEAL
This proposal could take many forms but would raise the debt ceiling for a matter of weeks or a few months, with offsetting spending cuts and/or revenue changes. Obama has repeatedly said he will not sign such a deal.
Supporters of the plan say the two sides cannot agree and this deal is the best they can do, but critics say it puts off the tough decisions and barely scratches the surface of the problem.
OBAMA'S COMPROMISE DEAL
This is a set of principles and not a specific plan. Obama has said he wants a "grand compromise" that would reduce the deficit over the next 10 or 12 years by roughly $US4 trillion.
This is essentially a broad outline for a plan similar to the Gang of Six. Obama has indicated that such a deal would include tax reform and Medicare changes.
'CUT, CAP AND BALANCE'
This plan, passed by the House, would raise the debt ceiling if Congress agrees to do three things: cut discretionary spending by $US111 billion next year; cap that spending in future years to a certain percentage of GDP; and pass a balanced budget amendment to the Constitution.
'Cut, cap and balance' is a long-term proposal that aims to force more fiscal restraint upon all future Congresses by changing the spending rules overall. Supporters of the plan say this is the one proposal that forces Congress, now and in the future, to have fiscal restraint.
