TAMPA, Fla. — Time is ticking in Washington, DC as the deadline to raise the U.S. debt ceiling to avoid the nation defaulting for the first time ever will arrive on October 18.
Treasury Secretary Janet Yellen has warned that failing to raise the debt limit could yield “catastrophic” consequences. While it 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 even 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 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 from 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 October 18. Thus, setting Monday, October 18 as the date the United States will hit the current debt limit.
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 would likely 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 seniors could stop receiving Social Security payments, or see delays.
- 30 million families could stop receiving President Joe Biden's expanded Child Tax Credit 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 the 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 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.
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 approximately $28.5 trillion. Congress must act to raise the limit to avoid hitting the debt ceiling. Democrats in the Senate want to raise the debt limit, suspend the debt limit, or eliminate it outright. The House of Representatives, controlled by Democrats, passed a debt ceiling suspension last week, but Senate Republicans killed the bill in the Senate. Senate Minority Leader Mitch McConnel (R-KY) said it’s up to Democrats to lift the debt ceiling since they control the White House, the Senate, and the House. However, Senator McConnell’s party member won’t allow a simple majority vote on raising the debt limit.
What about using budget reconciliation?
This idea has been floated by McConnell multiple times. It’s a legislative technique that allows Congress to expedite tax, spending, and debt-limit legislation. Republicans used the technique in 2017 to pass former President Donald Trump’s tax packages. All items in the final package have to pass the Senate parliamentarian to be included, but reconciliation bypasses the ability of the minority party to filibuster (require 60 votes, to pass legislation). Democrats have repeatedly ruled this path out as it could take weeks to put together, Republicans could run out the clock through what are called vote-a-rama’s in the Senate, and politically they want the GOP to deal with the fiscal reality of bills the party passed in recent years.
Will either side budge on their position?
It’s 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. This time, McConnell and Senate Republicans are framing the issue as an attempt by Democrats to go on a spending spree. However, the debt limit is to pay for previous bills already incurred. Democrats are framing the issue as putting the United States on a course to economic catastrophe. Republicans agree hitting the debt limit would be devastating. As of now, neither side is giving an inch on their respective
What about the trillion-dollar coin?
The pitch on 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 many.
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. However, if President Biden went down this path, which has been supported by Nancy Pelosi and Bill Clinton in the past, Vox reported it’s not clear that anyone would have legal standing to sue and challenge such a decision.
What happens now?
Congress has for years been governed by deadlines and crises, many times waiting until the very last possible minute to put together needed legislation. And with precious few days left until the October 18 deadline, both sides remain dug in on their positions. The White House continues to push Congress to take action, but nothing is imminent as the Senate remains deadlocked.
As each day passes without a deal or plan in place, the United States edges closer and closer to hitting the debt ceiling and default.
Sources: The U.S. Treasury Department; Treasury Secretary Janet Yellen; Congressional Budget Office; Congressional Research Service; Politifact; U.S. Constitution; Axios; the Brookings Institute; ABC News; CNBC; Vox