Lawmakers are on an economic crash course.
Amid an intense standoff between Republicans and Democrats, the Treasury Department alerted Congress that the U.S. could default on its debt as early as June 1 if legislators fail to act.
“We have learned from past debt limit impasses that waiting until the last minute to suspend or increase the debt limit can cause serious harm to business and consumer confidence, raise short-term borrowing costs for taxpayers, and negatively impact the credit rating of the United States,” Treasury Secretary Janet Yellen wrote in the letter on Monday.
This isn’t the first time Yellen has warned that the country is in dire straits with the debt limit. After the U.S. officially hit its $31.4 trillion borrowing limit in January, she said the Treasury would have to take “extraordinary measures” to avert what could be the first debt default in history.
For many years, raising the debt ceiling was considered just a routine congressional move, but now, both sides are digging into their positions and refusing to budge. Newly empowered GOP conservatives, backed by House Speaker Kevin McCarthy, have leveraged the debt ceiling as a way to force budget cuts, even though President Biden has already made it clear that he’d oppose any such moves. Meanwhile, Democrats plan to raise the federal borrowing limit without any strings attached and bypass McCarthy by using a special rule to bring up the proposed legislation for a vote. The backup plan doesn’t look very promising, though, because it would need total support from all House Democrats, and a few rank-and-file Republicans.
Of course, all of this drama raises questions over what the debt limit is, when the U.S. will actually hit it, and what would happen if the country is pushed over the edge financially. As Congress races to come to a truce, here’s what we know so far.
What is the debt ceiling?
The U.S. puts a cap on the legal amount of money that the federal government is allowed to borrow via U.S. Treasury securities, such as bills and savings bonds. For the record, over the last three decades, Congress has either personally raised, temporarily extended, or revised the debt limit on 78 separate occasions, including 49 times under Republican presidents and 29 times under Democratic presidents.
The last hike wasn’t that long ago: In December 2021, President Biden signed a resolution to increase the debt ceiling by $2.5 trillion, though that was only meant to be a temporary fix. It’s also worth noting that lifting this ceiling doesn’t authorize any new spending, but rather, simply gives the government the final go-ahead to pay off its existing obligations that have been approved. This includes funding for everything from social safety net programs to salaries for the military.
But is this early 20th-century practice still necessary? The statutory debt limit was first introduced in 1917 so that the Treasury Department didn’t have to ask permission from Congress each time it needed to issue bonds to pay bills. Since then, Yellen has asked Congress — which has to approve all government borrowing — to do away with it altogether, arguing that the cap is arbitrary and blocks the federal government from spending money that has already gotten the necessary congressional approval. This call has gone ignored, and it seems like the debt limit will stick around for the foreseeable future.
When will the U.S. hit the debt ceiling?
The U.S. technically hit its debt limit in January. At the time, Yellen said the agency would start taking steps to foot the bill for the government’s financial obligations. The Treasury also said it would temporarily resort to redeeming existing and suspending new investments in the Civil Service Retirement and Disability Fund and the Postal Service Retiree Health Benefits Fund. That said, federal retirees or employees aren’t expected to be affected, and the funds will return to normal once the impasse ends.
On top of taking these steps, Yellen said Monday that the Treasury also plans to increase its borrowing to $726 billion during the April to June quarter of this year, despite the already hefty debt load. Up until now, the U.S. has never defaulted on its debt. But Yellen warns that if Congress fails to act, the Treasury will really run out of cash — what’s known as the X-date — on June 5, which is earlier than previous estimates. Goldman Sachs had previously put that date around August.
In the past, Congress has typically avoided breaching the limit by just raising it. But what makes this time around especially tricky is that Republicans, who now control the House, have demanded that any lifts on the borrowing cap should be tied to spending cuts. If these demands weren’t enough, they also adopted new rules governing legislation that make raising this ceiling more difficult. Meanwhile, the White House has countered by saying it will not offer any concessions or negotiate. So far, neither side has agreed to meet in the middle.
What happens if the U.S. goes over the debt ceiling?
Since the U.S. has never defaulted on its debts, no one really knows yet what all of the repercussions will be, but the White House warns that it’s expected to lead to “widespread and catastrophic for the U.S. (and global) economy.”
According to the Democratic think tank Third Way, going over the debt limit could kill up to three million jobs, add $130,000 to the cost of an average 30-year mortgage, and tack on an additional $850 billion to the national debt.
But even just approaching the brink can cause some serious damage. In 2011, congressional Republicans and President Barack Obama were able to narrowly avert hitting the debt ceiling, but it took almost half a year for stocks and market stability to return to normal.
For now, it’s too soon to tell what the damage might be this time around, but if the 2011 debt ceiling breach is anything to go by, it’s not a marker to mess with, no matter which side of the aisle you fall on.
