An inverted image of the U.S. Capitol is reflected in puddle on the East 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 mired in a standoff over the debt limit. Failure to raise or suspend it could result in the first-ever U.S. default. Treasury Secretary Janet Yellen has warned that the U.S. could run out of money to pay its obligations as soon as June 1 if Congress doesn't address the matter.
With neither side looking likely to budge, here's what you need to know about the situation.
What is the debt ceiling?
It is the maximum amount of money Congress allows the federal government to borrow to cover its bills. Because the government typically spends more money than it collects in taxes, it must take out debt to pay its expenses. Unlike a credit card, though, the expenses were already approved by Congress, so the debt ceiling does not pertain to new spending.
The mechanism was created during World War I in an effort to simplify borrowing. Prior to 1917, Congress needed to approve additional debt for each new spending measure it passed. Until recently, it has been a rather routine process. Congress has lifted the debt limit 78 times since 1960. The debt ceiling was last raised in December 2021 by $2.5 trillion, capping the limit at $31.381 trillion.
If Congress does not agree to lift the debt ceiling, the government will not have money to pay its bills and will default on its debt. The Treasury Department has already begun to take extraordinary measures to continue to fund the government, but Yellensaid she expects funding to entirely deplete in early June.
What happens if the U.S. defaults?
Defaulting on sovereign debt would wreak havoc on the economy and roil markets around the world. A default on Treasury bonds could throw the U.S. economy into a tailspin. The last time Congressional Republicans threatened a default in 2011, Standard & Poor's downgraded the U.S. credit rating for the first time ever to AA+ from AAA.
If the U.S. were to default, gross domestic product would drop 4% and more than 7 million workers would lose their jobs, Moody's Analytics recently projected. Even a brief default would lead to the loss of 2 million jobs, according to the data.
In that scenario, U.S. bond ratings would be classified as "restricted default," according to Fitch Ratings, and Treasurys would have a D rating until the U.S. could once again borrow. The Brookings Institution noted a default could lead to $750 billion in higher federal borrowing costs over the next decade.
What's more, a default would shake the U.S. position on the world stage. U.S. Director of National Intelligence Avril Haines told the Senate Intelligence Committeelast week thatRussia and China will take advantageof the U.S. potentially defaulting on its debt. Haines warned the two nations would attempt to highlight "the chaos within the United States, that we're not capable of functioning as a democracy."
What about government programs?
Were the U.S. to default, it would mean a pause on tens of billions of dollars in payments. The Bipartisan Policy Center estimates in the first half of June, $50 billion in Social Security benefits are set to be dispersed, $20 billion in Medicaid provider payments, $12 billion in veterans' benefits, $6 billion in federal salaries and $1 billion in SNAP benefits.
In an interview Monday with CNBC, Yellen demurred 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 get into discussing them and ranking them because as every Treasury secretary has known, the only option that really leaves our economy and our financial system in good shape is raising the debt ceiling and making clear that Congress stands behind the basic principle that America pays its bills."
What is the Republican position?
Republicans are concerned about the increasing national debt, which has grown from less than $1 trillion in the 1980s to more than $30 trillion today. They are refusing to lift the debt ceiling unless it is paired with spending cuts.
House Republicans passed the Limit, Save and Grow Act last month outlining the areas they want to pare back. The billwould impose sweeping cuts to federal discretionary spending, impose new work requirements for welfare recipients and expand mining and fossil fuels production, all in exchange for raising the debt limit for about a year.
What is the White House's position?
The White House has remained steadfast that it is Congress's responsibility to raise the debt ceiling without conditions, as was done three times under the Trump administration. President Joe Biden has repeatedly called on House Republicans to pass a clean debt ceiling increase and have a separate conversation about spending cuts in the budget.
The president has pleaded with lawmakers to engage in"normal arguments"instead of ultimatums.
"As I've said all along, we can debate where to cut, how much to spend, how to finally overhaul the tax system to where everybody has to pay their fair share or continue the route their on, but not under the threat of default," Biden said Friday. "Let's remove the threat of default. Let's have normal arguments. That's why we have a budget process to debate in the open so you all can see it."
What's next?
Leaders from both parties will have to continue discussions in order to reach a compromise before the projected June 1 deadline. If they do not, the Treasury will have to begin making decisions on which bills to prioritize before they run out of money entirely, something Yellen has called untenable.
FAQs
Congress has lifted the debt limit 78 times since 1960. The debt ceiling was last raised in December 2021 by $2.5 trillion, capping the limit at $31.381 trillion. If Congress does not agree to lift the debt ceiling, the government will not have money to pay its bills and will default on its debt.
What do you need to know about the US debt ceiling? ›
The debt ceiling, or the debt limit, is the maximum amount that the U.S. government can borrow to meet its legal obligations by issuing bonds. If the Treasury Department can't pay expenses when the debt ceiling is reached, there is a risk that the U.S. will default on its debt.
Will the debt ceiling affect social security? ›
It's important to understand that the funds for your Social Security checks are not at risk in a potential debt ceiling crisis. The issue is who sends out your payments. The U.S. Treasury is tasked with dispatching Social Security payments to beneficiaries.
Should we be worried about the debt ceiling? ›
Potential repercussions of reaching the ceiling include a downgrade by credit rating agencies, increased borrowing costs for businesses and homeowners alike, and a dropoff in consumer confidence that could shock the United States' financial market and tip its economy—and the world's—into immediate recession.
What was the original purpose of the debt ceiling? ›
The first debt limit was established to give the Treasury autonomy over borrowing by allowing it to issue debt up to the ceiling without congressional approval, making it easier to finance mobilization efforts in World War I. Before that, Congress generally had to authorize the Treasury to borrow in smaller increments.
Who does the US owe money to? ›
Nearly half of all US foreign-owned debt comes from five countries.
| Country/territory | US foreign-owned debt (January 2023) |
|---|
| Japan | $1,104,400,000,000 |
| China | $859,400,000,000 |
| United Kingdom | $668,300,000,000 |
| Belgium | $331,100,000,000 |
6 more rowsTried and true basics. "We're advising people to prepare for a potential default as you would for an impending recession," says Anna Helhoski of NerdWallet. That means tamping down on excess spending, making a budget, and shoring up emergency savings to cover at least three months of living expenses.
What happens to Social Security if US defaults on debt? ›
Though trust funds are in place to support Social Security payments to recipients in the event of a debt default, they could be depleted if the United States enters into a debt default.
Will I get my Social Security check if the government defaults? ›
While a shutdown would disrupt some government services, Social Security and SSI payments are not at risk, according to experts. Social Security and SSI recipients were paid in full during previous shutdowns, said David Camp, interim CEO of the National Organization of Social Security Claimants' Representatives.
Can debt be taken from Social Security? ›
Social Security and Social Security Disability Insurance (SSDI) can sometimes be garnished to pay money you owe to the government, such as back taxes or federal student loans, and money you owe for child or spousal support.
There's just a 2% possibility the U.S. government will default on its loans, according to analysts at Deutsche Bank, despite days of stalled-out negotiations.
How much does China owe us? ›
The United States pays interest on approximately $850 billion in debt held by the People's Republic of China. China, however, is currently in default on its sovereign debt held by American bondholders.
Why is the US in so much debt? ›
One of the main culprits is consistently overspending. When the federal government spends more than its budget, it creates a deficit. In the fiscal year of 2023, it spent about $381 billion more than it collected in revenues. To pay that deficit, the government borrows money.
Will the US ever get out of debt? ›
Economists at the Penn Wharton Budget Model estimate that financial markets cannot sustain more than twenty additional years of deficits. At that point, they argue, no amount of tax increases or spending cuts would suffice to avert a devastating default.
When was the last time Congress borrowed from Social Security? ›
As a stop-gap measure, Congress passed legislation in 1981 to permit inter-fund borrowing among the three Trust Funds (the Old-Age and Survivors Trust Fund; the Disability Trust Fund; and the Medicare Trust Fund). This authority was to lapse at the end of 1982.
Do other countries have a debt ceiling? ›
Several countries have debt limitation laws in place. Only Denmark and the United States have a debt ceiling that is set at an absolute amount rather than a percentage of GDP. The US Congress began using the measure in 1917 and modified the financing law in 1939 to give the treasury more flexibility in issuing debt.
What happens when the US reaches its debt ceiling? ›
Failing to increase the debt limit would have catastrophic economic consequences. It would cause the government to default on its legal obligations – an unprecedented event in American history.
How will debt ceiling affect stock market? ›
While the debt ceiling issue was regularly in the headlines over the first five months of 2023, it appeared to do little to move the stock market. During that time, the value of the benchmark S&P 500 index fluctuated between 3,800 and 4,200.
What happens if the US defaults on its debt? ›
Credit rating downgrade: A default could prompt credit rating agencies to downgrade the government's credit rating. This downgrade would make borrowing more expensive for the government, potentially leading to higher interest rates on government debt and negatively impacting investor confidence.
How many countries besides the US have debt ceilings? ›
Several countries have debt limitation laws in place. Only Denmark and the United States have a debt ceiling that is set at an absolute amount rather than a percentage of GDP. The US Congress began using the measure in 1917 and modified the financing law in 1939 to give the treasury more flexibility in issuing debt.
