Debt ceiling fight: 'The mother of all budget battles'

Just when you thought you'd wrapped your head around last week's narrowly-avoided government shutdown, along comes another fiscal feud that threatens to put all the rest to shame. Congress will shortly have to vote on raising the federal debt limit. Just as in last week's shutdown drama, Republican lawmakers say they will not vote for it unless the Democrats agree to significant spending cuts. But the stakes are far higher than a simple government shutdown: If the debt ceiling is not raised, the government could default on its borrowings, an event which would have dire consequences for the global economy. Here, an instant guide to the "mother of all budget battles":

What is a debt ceiling?

It's the amount of money Congress allows the U.S. government to borrow. The current debt ceiling is about $14.3 trillion, a figure that should be reached within the next five weeks, according to Treasury Secretary Tim Geithner. To avoid possible default, Congress must authorize a $1 trillion increase in the debt ceiling. The deadline is likely to be hit on or around May 16, though Geithner said that the Treasury could stave off default until July 8.

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Why does the government owe so much money?

Because it spends more than it earns. For every $1 that the U.S. government spends, it collects around 60 cents in taxes. The rest, it borrows from investors. The imbalance stems mainly from a decade of expensive government policies — the wars in Iraq and Afghanistan, Medicare prescription-drug benefits, stimulus spending, and tax cuts. The steadily-increasing costs of Medicare, Medicaid, and Social Security only add to the burden. The limit has been raised seven times since June 2002, and only once under President Obama.

What happens if the government defaults?

For one, the government would grind to a halt — cutting off military salaries and retirement benefits, along with Social Security and Medicare payments. Worse still, default would also plunge the U.S. back into recession. Interest rates and borrowing costs would surge, while the dollar would plummet. In a worst case scenario, the markets would go into a death spiral as investors distanced themselves from the U.S. The consequences would be "catastrophic," says Geithner. Federal Reserve Chairman Ben Bernanke said it would be a "recovery-ending event."

Does everyone accept that?

No. Some GOP lawmakers believe a default is far from guaranteed. Rep. Ron Paul (R-Texas) says "establishment pressure and media alarmism" have conditioned Congress to believe such an event is inevitable. If the government was to cut enough spending, he says, Congress would not need to approve another debt ceiling rise. He and several other Tea-Party backed Republicans say they will vote against raising the debt limit.

Couldn't the government just cut spending instead of borrowing more money?

In the long term, perhaps, but not now. To achieve a balanced budget before the vote, the government would need to slash spending by about 40 percent overnight, a near-impossible task. Geithner has told lawmakers that Congress would have to cut $700 billion in spending this year alone to avoid raising the debt limit. That would mean eliminating all discretionary spending — cuts that would undoubtedly push the country back into recession, say economists.

Is it just the Republicans making this a political issue?

No. It's always been a political issue. In 2004, Sen. Barack Obama voted against President George W. Bush's request to raise the debt ceiling to $8.18 trillion. It just so happens that this year, the debt ceiling must be raised at a time when government spending is at the center of the national dialogue — and weeks after Congress narrowly avoided a damaging government shutdown over it.

So what happens now?

The dealmaking begins. House Speaker John Boehner told reporters earlier this month that "there will not be an increase in the debt limit without something really, really big attached to it." Obama will address the nation on Wednesday to propose entitlement reforms and targeted spending cuts to help cut the deficit, but it's unlikely his proposals will go far enough to satisfy the GOP. Prepare for nothing less than an "epic fight that goes right to the wire with the full faith and credit of the United States hanging in the balance," says Jonathan Capehart in The Washington Post.

Sources: The New York Times, Bloomberg, National Journal, ABC News, CBS MoneyWatch, LewRockwell.com, Balloon Juice