The U.S. Capitol is reflected in a puddle on the Eastern Front, Tuesday, May 9, 2023. (Tom Williams/CQ-Roll Call, Inc via Getty Images)
Tom Williams | Cq-roll Call, Inc. | Getty Images
Republicans in the White House and Congress are deadlocked over the debt ceiling. Failure to raise or suspend it could lead to a first U.S. default.Treasury Secretary Janet Yellen warns US could run out of money to meet its obligations June 1 at the earliest If Congress does not address this issue.
With neither side likely to budge, here’s what you need to know.
What is the debt ceiling?
it is maximum amount Congress allows the federal government to borrow to pay its bills. Because the government typically spends more money than it taxes, it has to borrow to pay for its spending. Unlike credit cards, though, the spending has already been approved by Congress, so the debt ceiling has nothing to do with the new spending.
The mechanism was created during the First World War Efforts to simplify lending. Prior to 1917, Congress was required to authorize additional debt for each new spending measure it passed. Until recently, this has been a fairly routine process. Since 1960, Congress has raised the debt ceiling 78 times. The last time the debt ceiling was raised was in December 2021, by $2.5 trillion, bringing the ceiling to $31.381 trillion.
If Congress doesn’t agree to raise the debt ceiling, the government won’t have the money to pay its bills and there will be a debt default. The Treasury Department has begun taking extraordinary steps to continue funding the government, but Yellen said she expects the funds to be completely depleted by early June.
What happens if the US defaults?
A sovereign debt default would wreak havoc on the economy and roil global markets.enabled by default The national debt could throw the U.S. economy into chaos.The last time congressional Republicans threatened to default was in 2011, S&P Downgrade of US credit rating Going from AAA to AA+ for the first time ever.
If U.S. defaults, GDP will fall 4%, more than 7 million workers will lose their jobs, Moody’s Analytics recent estimate. Even a brief default could cost 2 million jobs, the figures show.
According to Fitch Ratings, in such a scenario, the U.S. bond rating would be classified as “limited default,” while U.S. Treasuries would receive a D rating until the U.S. can borrow again. Defaults could increase federal borrowing costs by $750 billion over the next decade, according to the Brookings Institution.
More importantly, a default would destabilize America’s standing on the world stage. U.S. Director of National Intelligence Avril Haynes told the Senate Intelligence Committee last week that Russia and China would take advantage of a potential U.S. default on their debt. Haynes warned that the two countries would try to highlight “the chaos within the United States and our inability to function as a democracy.”
What about government programs?
A U.S. default would mean suspending tens of billions of dollars in payments. The Bipartisan Policy Center estimates that in the first half of June, $50 billion in Social Security benefits, $20 billion in Medicaid provider payments, $12 billion in veterans benefits, $6 billion in federal payrolls and $1 billion in SNAP benefits.
In an interview with CNBC on Monday, Yellen demurred when asked how the payments would be prioritized.
“There are no good choices; every choice is a bad choice,” Yellen said. “I really don’t want to discuss them and rank them because, as every Treasury secretary knows, the only option that really keeps our economy and financial system in good shape is to raise the debt ceiling and make it clear that Congress supports America paying the bills basic principles.”
What is the position of the Republican Party?
Republicans worry about the growing national debt, which has grown from less than $1 trillion in the 1980s to more than $3 trillion today. They have refused to raise the debt ceiling unless it is accompanied by spending cuts.
House Republicans passed the Limits, Savings and Growth Act last month, outlining areas they want to cut. The bill would cut federal discretionary spending across the board, impose new job requirements on welfare recipients and expand mining and fossil fuel production, all of which would raise the debt ceiling for about a year.
What is the White House’s position?
The White House has been adamant that it is Congress’ responsibility to unconditionally raise the debt ceiling, as the Trump administration has done. President Biden has repeatedly called on House Republicans to pass a definitive debt ceiling hike and hold separate discussions on budget spending cuts.
President implores lawmakers to get involved “Normal arguments” not ultimatums.
“As I’ve always said, we can discuss where to cut, how much to spend, how to ultimately overhaul the tax system so that everyone has to pay their fair share or continue on their course without being threatened with default,” Bay said. Deng said on Friday. “Let’s remove the threat of default. Let’s have a normal debate. That’s why we have a budget process that’s open to debate, so you can all see it.”
What’s next?
Leaders on both sides will have to continue discussions to reach a compromise before the expected June 1 deadline. If they don’t, the Treasury will have to start deciding which bills to prioritize before the funds run out entirely, which Yellen said is untenable.