What Is the Debt Ceiling and Why Does It Matter?
If Congress doesn’t increase the debt limit the government would be unable to pay its bills resulting in a first-ever default, which would be catastrophic for the U.S. economy.
Fill Me In: The U.S. federal government has reached the limit on the amount of debt it is legally allowed to accrue. Congress sets this amount, known as the debt limit, and has the power to raise it to meet the country’s financial obligations. Once the debt limit is reached, the Treasury Department has a limited number of tools, called extraordinary measures, that allow the Treasury to keep paying the government’s bills.
Once the extraordinary measures are exhausted, if Congress doesn’t increase the debt limit, the government would be unable to pay its bills resulting in a first-ever default, which would be catastrophic for the U.S. economy.
What Exactly Is the Debt Limit? The debt limit is the total amount of money the U.S. federal government is authorized to borrow to meet its existing financial obligations, including Social Security and Medicare benefits, salaries of members of the military, interest on the national debt, tax refunds, and other payments.
Raising the debt limit does not amount to new spending by the federal government. It only allows the government to continue borrowing to fund spending Congress has already approved.
U.S. debt increases over time as the government runs a deficit – or when total spending exceeds the amount of money the federal government collects – and periods of sustained debt increases cause the federal government to reach the debt limit.
By the Numbers:
- $31.381 trillion: The current federal debt limit, which was last raised in December of 2021.
- 102: The number of times the U.S. government has increased the debt limit since World War II.
Why Does Defaulting Matter? If the U.S. government is unable to borrow to pay its bills, it will default. This means it will be forced to skip legally due payments, whether they be to America’s seniors, contractors, or payments to bondholders. This calls into question the full faith and credit of the United States government and our commitment to paying our bills.
What Happens if the U.S. Defaults? It is impossible to overstate the negative consequences that would occur if the United States were to default on its debt.
The U.S. economy and global financial system are all underpinned by the idea that the U.S. government – unlike others around the world – always pays its bills. Investments in U.S. debt are considered “risk-free”, which means the federal government pays less to borrow money. All other debts and their interest rates are based off the risk of that debt relative to risk-free treasuries. It is also a principal reason that the U.S. dollar is the global reserve currency, giving the U.S. both economic and national security advantages (advantages that China, for example, is looking to undermine through a competitor to the dollar).
Defaulting would mean that the U.S. government no longer always pays its bills. Treasuries would no longer be risk-free. Interest rates for the government and everyone else would rise as the financial system tries to sort itself out. The role of the dollar globally would be weakened, perhaps permanently. Most analysts believe this would result in an immediate recession with long-term negative effects.
Some say the federal government can prioritize which payments to make after a default. The truth is the federal government cannot simply pick and choose which legal obligations it is going to follow and which ones it doesn't. That is simply default by another name.
What Happens Next? Treasury expects that the extraordinary measures will stave off a default until at least June, but they remain uncertain about how much longer beyond that.
Our Take: We have a debt and deficit problem. It is fairly routine to include policies to reduce the deficit in a bill to raise the debt limit.
That is why the best path forward is raising the debt limit and enacting proposals to help us begin to address the debt and deficit. Of course, because we are in divided government, those proposals will have to be bipartisan. Fortunately, there are numerous bipartisan proposals, such as the TRUST Act, to address entitlement funding that could be passed as part of a debt limit increase.
Bottom Line: We need serious solutions to address both our debt and deficit, but at the end of the day, defaulting on the debt and not raising the debt limit actually make the problem even worse.
Original Article - What is the Debt Ceiling and Why Does It Matter?