The United States is facing a dilemma over whether to raise or suspend the country’s debt limit. That is, the U.S. Congress limits the amount of money the federal government can borrow to pay its bills, the “debt limit.” The government has already reached this limit and is about to run out of money to pay its bills. Republicans and Democrats in Congress need to reach an agreement or many Americans will be severely affected.
The Republicans are demanding that any increase in the borrowing limit be accompanied by spending cuts. But President Biden has stated that he opposes any attempt to link spending cuts to the increase in the debt ceiling.
The president met with Republican and Democratic leaders at the White House on Tuesday (9) to discuss a way forward. But it is still unclear how quickly lawmakers will act to raise the country’s borrowing limit.
What do you need to know about the debt limit and what happens if no agreement is reached?
What is the debt limit?
The debt limit is the maximum amount that the United States is authorized to borrow to meet its financial obligations.
As the federal government has a budget deficit – meaning it spends more than it collects in taxes and other revenues – it needs to borrow large sums of money to pay its bills. These obligations include funding social programs, paying interest on the national debt, and salaries for military personnel.
Raising the debt limit does not authorize any new government spending – in fact, it simply allows the United States to spend money on programs that have already been authorized by Congress.
When was the debt ceiling reached?
The United States officially reached the debt ceiling on January 19, leading the Treasury Department to use some accounting maneuvers, known as extraordinary measures, to continue paying government obligations and avoid a default. These measures temporarily restrict some government investments so that bills continue to be paid.
The ability to use these measures to delay a default may run out in June. Treasury Secretary Janet L. Yellen warned on Monday (8) that the United States could run out of money by June 1 if the borrowing limit is not raised or suspended.
What is the current U.S. debt?
The national debt surpassed $31 trillion for the first time last year. The borrowing limit is $31.381 trillion.
Why does the United States have a borrowing limit?
According to the Constitution, Congress must authorize government borrowing. In the early 20th century, the debt limit was instituted so that the Treasury would not need to seek permission from Congress every time it had to issue debt to pay bills.
During World War I, Congress passed the Second Liberty Bond Act of 1917 to give the Treasury more flexibility to issue debt and manage federal finances. The debt limit began to take its current form in 1939 when Congress consolidated different limits that had been established for different types of bonds into a single borrowing limit. At that time, the limit was $45 billion.
Although the debt limit was created for better control, many policymakers believe it has become more problematic than it is worth.
What happens if the debt ceiling is not raised or suspended?
If the government exhausts its extraordinary measures and runs out of cash, it will not be able to issue new debt. This means it will not have enough money to pay its bills, including interest and other payments due to bondholders, military salaries, and retirement benefits.
No one knows exactly what will happen if the United States reaches that point, as it has never happened before. Economists and Wall Street analysts warn that such a scenario would be economically devastating and could plunge the entire world into a financial crisis.
Will military salaries and pensions be paid?
Several ideas have been raised to ensure that critical payments are not missed – particularly payments to investors holding U.S. debt, military personnel, and retirees. But none of these ideas have ever been tried, and it is still unclear whether the government could actually continue paying any of its bills if it cannot borrow more money.
One idea that has been proposed is for the Treasury Department to prioritize certain payments to avoid a U.S. debt default. In that case, the Treasury would pay bondholders who hold U.S. Treasury debt first, even if it delayed other financial obligations, such as government salaries or retirement benefits.
So far, the Treasury seems to have ruled out this option.
“The Treasury’s systems were all built to pay all of our bills on time and in full, and not to prioritize one form of spending over another,” Yellen told reporters earlier this year.
Source: The New York Times