The US debt ceiling: What it is and what happens if Congress doesn’t raise it


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The US government has never defaulted on its debts — but actions by Senate Republicans are threatening to shatter the nation’s financial track record. At the center of the congressional fight is a somewhat obscure bureaucratic mechanism: the debt limit, which is the amount of money the government is legally allowed to borrow. Failing to raise (or suspend) it could lead to dire financial consequences that could impact every part of the US economy.

The Democratic-led House of Representatives narrowly passed a bill along party lines last week to fund the US government through the beginning of December and suspend the debt ceiling until the end of 2022. But Senate Republicans blocked the measure on Monday — not a single Republican voted in favor — setting the stage for a clash. The US government could run out of money as soon as Oct. 15, according to an analysis published by the Bipartisan Policy Center.

The stakes are high. If the ceiling isn’t raised or suspended, it will almost certainly impact the US economy at a macro level, with experts forecasting interest rates spikes and stock price plunges. But the effects will surely be felt on an individual basis, too, as a government spending freeze would reduce or eliminate funding for vital programs, including food assistance for low-income Americans, Medicare and Social Security, and payouts to retired veterans. 

Read on for more about this complex, thorny issue and what it means for you.

What is the debt ceiling?

The debt ceiling, also known as the debt limit, is the amount of money the US Treasury Department is allowed to borrow to pay its bills. Because the revenue collected from income taxes isn’t enough to cover its expenditures, the US government borrows money to pay for many essential functions. These include providing Social Security and Medicare benefits, paying the salaries of military personnel, paying for tax refunds and paying to service its already significant national debt, which currently stands at roughly $28 trillion.

When does the current debt ceiling expire?

Congress sets the amount of money the US Treasury Department can borrow, and, since 1960, it has raised, extended or revised the debt ceiling 78 times — including in 2019, when it voted to suspend the debt limit for two years. That two years came up on Aug. 1. If Congress doesn’t act, the US government will be unable to meet all its obligations in full and on time somewhere between Oct. 15 and Nov. 4, according to a recent analysis from the Bipartisan Policy Center.

What’s the political context?

Congress faces two key issues, one of which was resolved on Thursday. First, Congress needed to pass a spending budget to fund the US government to avert a shutdown. The other issue is the suspension of the debt ceiling, which would allow the US Treasury to borrow more money to pay its ongoing financial obligations.

To avert a government shutdown, Congress needed to pass some sort of government funding package by Thursday, the end of September. However, legislators haven’t yet hashed out a full budget. To avoid a shutdown, on Sept. 21, Democrats in the House of Representatives passed a continuing resolution — essentially, a stopgap measure — to keep the government funded at its current level until sometime in December. But the House’s resolution included a debt limit suspension for the US Treasury — a provision that Republicans in both the House and Senate opposed.

Both chambers of Congress approved a measure on Thursday to fund the US government until early December, averting the government shutdown that was set to occur at midnight. President Biden is expected to sign the bill soon. However, the debt ceiling issue was left to the side, for now, leaving Congress with this significant problem still on the table. 

Why is the GOP refusing to increase the debt limit?

Although Republicans and Democrats alike voted to lift the debt ceiling on three occasions while Donald Trump was president, Republicans have framed this suspension as enabling a “spending binge,” in the words of Sen. Pat Toomey, a Republican from Pennsylvania, who spoke at a Banking, Housing, and Urban Affairs committee hearing Tuesday. 

On Monday, Senate Republicans voted to kill a resolution that would have suspended the debt ceiling, funded the government and averted a shutdown. Senate Majority Leader Chuck Schumer, a Democrat from New York, voted “no” to allow him an opportunity to call another vote on the issue.

Can Democrats use reconciliation to increase the debt ceiling?

One potential option for Democrats is to use a legislative technique called budget reconciliation to pass a budget and either suspend or increase the debt ceiling. Created by the Congressional Budget Act of 1974, budget reconciliation allows Congress to expedite tax, spending and debt limit legislation. Importantly, reconciliation bills aren’t subject to the filibuster in the Senate; instead, they require only a simple majority of votes. As such, all 48 Senate Democrats, the two Independents who caucus with them, and tie-breaker Vice President Kamala Harris would have to vote for the bill for it to pass. But Senate Majority Whip Dick Durbin, a Democrat from Illinois, has already said that using budget reconciliation is “a nonstarter.” 

Why is there a debt ceiling?

The debt limit “was instituted by Congress during World War I to give the Treasury Department more discretion in making federal spending decisions,” according to Perry Adair, attorney and consultant at the federal lobbying team of Becker Lawyers. “Before the limit, Congress had to issue bonds individually — in the same way they passed any other bill.”

This made it significantly harder to finance the war since Congress needed to approve each bond separately. The creation of the debt limit was its response to this burden. Thus, nowadays, Congress can vote to either raise the debt ceiling or suspend it all together, according to Adair.

What’s the difference between raising and suspending the debt ceiling?

“Raising it would simply increase the amount of debt the country can take on,” Adair said. “Suspending it would instead allow for limitless borrowing until a date Congress specifies.”

What happens if Congress doesn’t raise or suspend the debt ceiling?

We don’t know exactly what will happen. This would be an unprecedented event. But the impact could be cataclysmic for the US economy and cause ripples across the world. And that is what many US officials are warning of. The consequences would “produce widespread economic catastrophe,” Treasury Secretary Janet Yellen wrote in The Wall Street Journal last week.

The US government would be forced to finance its debt obligations with whatever cash it has on hand. After it burns through that, the US government would likely default on its remaining debts. 

How would it affect the US economy?

The impact would be acute and widespread. Millions of Americans wouldn’t receive Social Security or Medicare benefits. The federal government would stop issuing paychecks for all US troops and federal employees, and only certain essential federal employees would be allowed to work. According to a report published by Moody’s Analytics, US GDP would decline, approximately 6 million jobs would be lost and the unemployment rate would increase dramatically. And, just as significantly, the country’s track record — at least as far as paying its debts are concerned — would be irrevocably stained.  

“Internationally, the United States will have for the first time undermined the full faith and credit of its own currency — a blow to our standing in the world and a boon for our adversaries such as China who are arguing to the world that the US is on the decline,” Adair said.

How could it affect me?

As with so many catastrophes, the economically disadvantaged will be disproportionately affected. Food assistance benefits would stop nationwide, monthly child tax credits would be delayed and compensation for veterans and pension payments would lapse. And state and local governments would no longer have access to federal aid when responding to emergencies like COVID-19 or natural disasters. 

Given that we are still navigating our way through the COVID-19 pandemic, the debt ceiling standoff couldn’t come at a worse time. Defaulting “would likely precipitate a historic financial crisis that would compound the damage of the continuing public health emergency,” Yellen wrote.



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