TAMPA, Fla. — It's not quite the doomsday clock, but time is quickly running out for Congress to raise the nation's debt ceiling to avoid a potentially catastrophic default on June 1.
Treasury Secretary Janet Yellen has warned that failing to raise the debt limit by June 1 could yield “catastrophic” consequences. While the debt limit, or debt ceiling, may sound like an abstract budgetary item that doesn’t impact many, the truth is, hitting the debt limit could have far-reaching consequences for many and generate problems no one has considered.
Here’s an in-depth Q&A into the U.S. debt limit.
What is the debt limit?
According to the United States Department of the Treasury, the debt limit is the total amount of money the government can borrow to pay its existing legal obligations (current bills), including Social Security and Medicare benefits, military salaries, interest on the national debt, tax refunds, and other payments.
Does increasing the debt limit authorize new spending?
The Treasury Department said increasing the debt limit “does not authorize new spending commitments.” Instead, increasing the debt limit allows the government to pay for existing legal obligations that Congresses and presidents of both parties have spent in the past.
When did the debt limit begin?
The debt limit dates to World War I. It was part of the Second Liberty Bond Act of 1917, which included an aggregate limit on federal debt along with limits on debt issuance. By 1939, a general limit was placed on federal debt. From 1945 until 1954, the debt limit stood at $245 billion, it was increased and by 1962, it was at $300 billion before Congress started raising it.
Who oversees lifting the debt limit?
Congress has the job of lifting the debt ceiling in order to pay for the bills already incurred by previous Congresses and administrations. Since March 1962, Congress has voted 78 times to raise, temporarily extend, or revise the definition of the debt limit. It’s happened 49 times under Republican presidents and 29 times under Democratic presidents, with Congressional leaders in both parties acknowledging the critical necessity of raising the limit.
When will the U.S. hit the debt ceiling?
The Treasury Department has been using “extraordinary measures” to keep the country going for the past several weeks. However, Treasury Secretary Janet Yellen said the department will “exhaust its extraordinary measures” if Congress has not acted to raise or suspend the debt limit by approximately June 1. Thus, setting Thursday, June 1, as the expected date, the United States will hit the current debt limit or default on its debt.
Has the U.S. ever hit the debt limit?
No. The U.S. came very close in 2011 as Republicans in Congress staged a debt-limit standoff with then-President Barack Obama over spending. A deal was eventually reached, but not before the U.S. credit rating was downgraded by Standard & Poor’s for the first time in 70 years. A similar situation happened in 2013, but the temporary rise in borrowing costs soon dropped after a deal was made.
What happens if we hit the debt limit?
Once the debt limit is hit, the federal government cannot legally borrow any more money. The government could use cash on hand and any new revenue coming in, but eventually, that would run out. At that point, the Treasury Department may have to prioritize payments, with bondholders getting the first payments. However, the Treasury Department has repeatedly said it’s not clear if it has the legal authority to prioritize payments. The short answer is the country would be in completely uncharted territory and would need legal guidance on how things could proceed.
What kind of impact could hitting the debt limit make?
If the federal government cannot borrow money to continue paying for programs, there will be immediate, real-world effects for millions of Americans. The Treasury Department, White House, and Committee for a Responsible Federal Budget told ABC News the following are potential governmental problems from breaching the debt limit:
- 15 million Americans could stop receiving Social Security payments or see delays.
- U.S. military service members could stop receiving paychecks.
- Veterans' benefits could stop or be delayed.
- Postal workers and federal employees could stop receiving paychecks.
- The United States' creditworthiness could be downgraded, spiking interest rates, which would raise mortgage, car, and credit card payments.
- Doubt in the typically reliable U.S. currency could tank global markets, hurting 401ks and other investments. (The S&P 500 lost 17% in the months surrounding the last debt ceiling standoff.)
- FEMA funding for hurricane and wildfire victims could stop.
- Public health funding for pandemic mitigation efforts could be cut off.
- Child nutrition programs and other food assistance could stop.
What is the worst-case scenario?
The worst-case scenario would be an extended fight over the debt ceiling with no end in sight. Moody’s Analytics has previously said a long-term impasse over the debt ceiling could cause the loss of nearly six million jobs and push unemployment to nine percent. Moody’s also said it could lead to a sell-off on Wall Street that might wipe out $15 trillion in wealth.
In Congressional testimony in March, Moody's Analytics Chief Economist Mark Zandi painted a dark picture of what could happen if the U.S. crashed into the debt limit. Initially, he compared it to the moment in 2008 when the TARP bailout failed to pass the House and the markets crashed within minutes.
"Say if the debt limit was breached on October 1 and dragged on all month, the Treasury would have no choice but to cut government spending by an estimated $125 billion. And if there is no agreement in November, another close to $200 billion in spending would need to be cut. The hit to the economy as these government spending cuts cascade through the economy would be overwhelming."
Zandi continued, "The economic downturn that would ensue would be comparable to that suffered during the global financial crisis (2008-2009). That means real GDP would decline beginning late this year and through much of 2024, falling over 4% peak to trough, costing the economy more than 7 million jobs, and pushing the unemployment rate over 8%. Stock prices would fall by almost a fifth at the worst of the selloff, wiping out $10 trillion in household wealth."
How would this impact me?
The possibilities depend on how long the debt limit stays the same. If it’s lifted after a short-term breach, the damage may be small, but no one knows for sure. But, hitting the deficit and not raising it long-term could lead to higher interest rates, higher business costs, the unemployed wouldn’t have the federal government to tap into to help ease the burden, and other large-scale financial problems.
How did we get here?
The current debt ceiling is $31.4 trillion. Congress must act to raise the limit to avoid hitting the debt ceiling. President Joe Biden and Democrats in both chambers of Congress have asked for a clean debt limit hike. Republicans in both chambers have rejected this possibility. House Republicans have tied raising the debt limit to a budget they passed that included major cuts to many domestic programs and other limits or budget freezes. Republicans in the House believe the dangers of not raising the debt ceiling give them leverage to force through cuts that Democrats would typically reject. Democrats are then put in the position of raising the debt ceiling with significant cuts to lots of programs or running the risk of default.
Will either side budge on their position?
It’s still too early to say. In the past, both sides have come together for the good of the nation and the nation’s economic standing in the world and raised the debt limit. The current standoff could be tougher to find common ground. Republicans have repeatedly said they will not negotiate on some issues that could be red lines President Biden and Democrats may not be willing to cross. Democrats have said there are programs they will not cut due to the potential harm to some Americans. Thus, both parties have repeatedly stated they will not budge from their positions. However, both sides have said similar things before, and deals have been found.
What about the trillion-dollar coin?
The pitch for this plan has been to mint a small platinum token and give it a face value of $1 trillion and deposit it in the Federal Reserve. The Federal Reserve would then credit Treasury with $1 trillion that wouldn’t count towards the national debt. While the idea is feasible, the legality would likely be challenged in the courts. It was proposed in 2011 during the debt-limit standoff and has been discussed for years but never used. Neither party has shown any favor for this plan, though it has garnered support among some outside of Washington. The plan would go to court. It would be difficult to know what that would mean for the debt, and how markets/rating agencies would view it is also unknown.
What about the 14th Amendment?
Section 4 of the 14th Amendment to the U.S. Constitution states, “The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned.” Some scholars have argued that makes a debt limit unconstitutional since hitting such a limit would threaten the validity of the public debt. There’s no consensus on the issue, though. If President Biden went down this path, a move to use the 14th Amendment doesn't appear to be a realistic option for the same reasons as the trillion-dollar coin and could set off a Constitutional crisis. However, the idea has been supported by Nancy Pelosi and Bill Clinton in the past and is still supported in 2023 by some Democrats in Congress and the Senate.
What happens now?
At this point, no one really knows. Congress has traditionally waited to act on major issues until an emergency hits or until the very last minute. One of the biggest complications is the June 1 deadline is, to a certain degree, fluid. The date could be June 8, according to Politico. However, that would be a guess, and delaying that late could run the risk of default hitting earlier.
Another complicating factor is the time it would take to get a deal passed through both chambers. According to a report from Politico, House Speaker Kevin McCarthy said a deal must be reached by the weekend of May 20-21 to avoid default. Politico said passing a bill could take up to about four days. Once passed through the House, it heads to the Senate, which can "take up to a week to process a bill without agreement from all 100 senators," Politico said.
Without unanimous consent, any deal would require at least 60 votes to pass. That gives each Senator a large amount of leverage to demand amendments that can delay passage. If unanimous consent is given, the Senate can move quicker.
Politico said McCarthy is budgeting a maximum of a week to pass legislation, though Senate Majority Leader Chuck Schumer said it would likely not take that long.
Still, even if it only took 3-4 days to pass through the Senate, combined with the four days from the House, that gives the deal roughly eight or nine days in a best-case scenario to avoid defaulting on the debt.
That means the latest possible date a deal should be struck is roughly May 22 or 23. After that, Congress would be gambling that the Treasury's date of June 1 was inaccurate. Whether the rating agencies and global markets would agree the U.S. avoided a default would be unknown.
As each day passes without a deal or plan in place, the United States edges closer and closer to hitting the debt ceiling and a default. It's a scenario that's only been considered in models but could come to fruition in less than two weeks unless that deal is struck.
Sources: The U.S. Treasury Department; White House; Treasury Secretary Janet Yellen; Congressional Budget Office; Congressional Research Service; Politifact; U.S. Constitution; Axios; the Brookings Institute; ABC News; CNBC; Vox
