Debt ceiling defined: What it is best to know

An inverted image of the US Capitol reflected in a puddle on the Eastern Front on Tuesday, May 9, 2023. (Tom Williams/CQ-Roll Call, Inc via Getty Images)

Tom Williams | Cq-roll Call, Inc. | Getty Images

The White House and Republicans in Congress are locked in a stalemate over the debt ceiling. Failure to raise or suspend interest rates could result in the US’ first-ever default. Treasury Secretary Janet Yellen has warned that the US could run out of money to meet its obligations as early as June 1 if Congress doesn’t deal with the matter.

With neither side likely to budge, here’s what you need to know about the situation.

What is the debt ceiling?

This is the maximum amount that Congress can borrow from the federal government to pay its bills. Since the state usually spends more money than it collects in taxes, it has to take on debt to pay its expenses. However, unlike a credit card, spending has already been approved by Congress, so the debt ceiling does not apply to new spending.

The mechanism was created during World War I to make borrowing easier. Before 1917, Congress had to approve additional debt for each new spending measure it passed. Until recently it was a rather routine process. Congress has raised the debt ceiling 78 times since 1960. The debt ceiling was last raised by $2.5 trillion in December 2021, bringing the ceiling to $31.381 trillion.

Unless Congress agrees to raise the debt ceiling, the government will have no money to pay its bills and will not pay its debts. The Treasury Department has already begun taking extraordinary measures to continue funding the government, but Yellen said she expects the funds to be fully depleted by early June.

What happens if the US defaults?

A sovereign debt default would have a devastating impact on the economy and would roil markets around the world. A default on government bonds could send the US economy into a tailspin. When Republicans in Congress last threatened to default in 2011, Standard & Poor’s downgraded the US credit rating from AAA to AA+ for the first time ever.

If the US defaulted, gross domestic product would fall by 4% and more than 7 million workers would lose their jobs, Moody’s Analytics recently predicted. Even a brief default would result in the loss of 2 million jobs, according to the data.

In this scenario, according to Fitch Ratings, US bond ratings would be classified as “limited default” and government bonds would be rated D until the US could resume borrowing. The Brookings Institution found that a default could result in $750 billion in higher federal borrowing costs over the next decade.

Furthermore, a default would shake the US position on the world stage. US Intelligence Director Avril Haines told the Senate Intelligence Committee last week that Russia and China would take advantage of a potential US default. Haines warned the two nations were trying to “highlight the chaos within the United States that we are unable to function as a democracy.”

What about government programs?

Should the US default, it would mean a tens of billions of dollars in pause in payments. The Bipartisan Policy Center estimates that in the first half of June, $50 billion in Social Security benefits, $20 billion in payments to Medicaid providers, $12 billion in veteran benefits, $6 billion in federal salaries and $1 billion -Dollars in SNAP benefits will be removed.

In an interview with CNBC on Monday, Yellen declined when asked how payments would be prioritized.

“There are no good options; every option is a bad option,” Yellen said. “I really don’t want to discuss them and rank them because, as every Treasury Secretary knows, the only option that’s really going to keep our economy and financial system in good shape is to raise the debt ceiling and make it clear that Congress is behind it.” stands.” The rationale is that America pays its bills.”

What is the Republican position?

Republicans are concerned about the rising national debt, which has grown from less than $1 trillion in the 1980s to over $30 trillion today. They refuse to raise the debt ceiling without spending cuts.

Republicans in the House of Representatives passed the Limit, Save and Grow Act last month, outlining the areas they want to limit. The bill would see sweeping cuts in discretionary federal spending, mandate new work requirements for welfare recipients, and expand mining and fossil fuel production — all in exchange for a debt ceiling hike for about a year.

What is the position of the White House?

The White House insists it is Congress’s responsibility to raise the debt ceiling unconditionally, as it has done three times under the Trump administration. President Joe Biden has repeatedly urged House Republicans to pass a clean debt ceiling hike and hold separate talks on budget spending cuts.

The president has asked lawmakers to engage in “normal arguments” rather than ultimatums.

“Like I’ve always said, we can discuss where we save, how much we spend, how we finally redesign the tax system so that everyone pays their fair share, or we can continue on the path we’re on but not below Threat of default,” Biden said on Friday. “Let’s eliminate the risk of default. Let’s argue normally. So we need to openly discuss a budget process for all of you to see.”

What’s next?

Leaders from both parties need to continue talks to reach a compromise before the scheduled June 1 deadline. If not, the Treasury Department must start making decisions about which bills to prioritize before it completely runs out of money, which Yellen has called untenable.

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