News Analysis: What happens if the U.S. breaches the debt ceiling?

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February 02, 2023
News Analysis: What happens if the U.S. breaches the debt ceiling?

What is the debt ceiling?

Every year since 2001, the U.S. government has spent more than it brings in taxes and fees. The government borrows money to fill the funding gap so it can continue to pay for a range of federal programs and agencies, including the U.S. military, Social Security and Medicare for retirees, among others. The government raises this money by selling interest-bearing securities such as Treasury bonds.

The debt limit, or debt ceiling, is a federal law that caps the total amount of money the United States can borrow to meet these legal expenditures.

Contrary to some public belief, raising the debt ceiling does not authorize the US federal government to spend more money. Congress has ultimate power over the budget process, and each year members of Congress vote on spending bills. But there have also been legal limits on the total amount of debt the U.S. government can take on since 1917. Raising the debt ceiling simply authorizes the Treasury to pay for spending already approved by Congress.

The U.S. has raised its debt ceiling 78 times since 1960, according to Treasury Department data. Congress votes to raise the debt ceiling separately from votes on government spending bills or tax bills.

Many Republican lawmakers believe the federal government is spending too much money. Some have suggested refusing to raise the debt limit as a way to rein in spending.

But some economists warn that a first-ever failure to pay interest on the $31.4 trillion U.S. national debt would have wide-ranging global consequences, including a downgrade of the U.S. credit rating and a weakening of the dollar, which could also lead to Stock market crash and recession.

What are “extraordinary measures”?

The US Treasury can temporarily delay reaching the debt ceiling through creative accounting measures. Those measures could include shifting debt between government agencies as payments come due, suspending investments in currency buying and selling, and temporarily halting investments in government workers’ pension plans.
How much time all of these actions will buy back is unclear. Treasury Secretary Janet Yellen wrote in a Jan. 13 letter to Congress that “cash and extraordinary measures are unlikely to be exhausted before early June.”

At some point, The US will have to resolve the impasse by raising the debt ceiling or slashing its obligations. For the vast majority of members of Congress, Democrats and Republicans alike, stopping funding for the military or cutting off Social Security payments for retirees would be unthinkable.

How do the White House and congressional Democrats propose to resolve the impasse?

Biden and Democrats, who hold a narrow majority in the Senate, want to raise the debt ceiling, as they have done for decades. There hasn’t been much debate, if any, at all about raising the debt ceiling.
But in 2011, with the US nearing its debt ceiling, the Republican-majority House asked then-president Barack Obama to cut a range of spending in exchange for higher borrowing limits. Republicans agreed to raise the cap in exchange for a package of future spending cuts, two days before the Treasury Department estimated the cap would be exhausted.

Although fiscal catastrophe was avoided, America’s long-term credit rating was downgraded slightly in 2011, in part because of debt-ceiling brinkmanship in Washington politics. Economists fear the current impasse could trigger another credit downgrade.A deal of the kind struck in 2011 may no longer be possible today. “We’re not going to have any negotiations,” White House press secretary Karine Jean-Pierre told reporters last week.

Senate Majority Leader Chuck Schumer and House Democratic Leader Hakeem Jeffries said in a joint statement that “extreme ‘Make America Great Again’ (MAGA) Republicans Forced defaults could plunge the U.S. into a deep recession and lead to higher costs for working U.S. families on everything from home mortgages and auto loans to credit card rates.”

What do congressional Republicans want?

Republicans believe that raising the debt ceiling is financially irresponsible, and that instead the U.S. should cut wasteful spending to lower debt.

“We’ve got to get our house cleaned up,” House Speaker Kevin McCarthy told reporters last week. “We Republicans will always protect Medicare and Social Security. We will protect them for the next generation. But we will scrutinize every dollar we spend. And that is the right of a hardworking taxpayer.”

According to reports, House Republicans Leadership told lawmakers at their weekly meeting that they would not agree to raise the budget without fiscal reforms, including capping fiscal 2024 spending at 2022 levels and balancing the U.S. budget over the next 10 years. The debt ceiling.

However, a bipartisan compromise is necessary because any legislation passed by the Republican-majority House of Representatives must also be passed by the Democratic-majority Senate and signed into law by President Joe Biden
Republicans have controlled the Senate throughout Donald Trump’s administration, which has raised the debt ceiling three times, and the House of Representatives during his first two years in office.

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