Janet L. Yellen, the Treasury secretary, at the Treasury Department in April
President Biden and top congressional leaders are scheduled to meet Tuesday to discuss how to raise the debt ceiling. This raises a lot of questions about what the debt ceiling really is and why the US has one.
Here’s everything you need to know about the debt ceiling.
What is the debt ceiling?
The debt ceiling is a limit on the amount of money the United States can borrow to keep the government funded and meet its financial obligations.
Because the federal government runs a budget deficit (that is, spending exceeds revenue from taxes and other sources), it must borrow huge amounts of money to pay its bills. The government’s financial obligations include funding the social safety net, paying interest on the national debt and military salaries.
Approaching the debt ceiling often leads to calls from lawmakers for spending cuts. But raising the debt ceiling does not authorize any new spending. In fact, it simply allows the United States to spend money on programs already passed by Congress.
When did the U.S. reach its debt ceiling?
The U.S. officially reached the debt ceiling on Jan. 19, leading the Treasury Department to resort to auditing techniques known as extraordinary measures to keep paying the government’s bills and avoid default. The measures put some government investments on hold in order to keep paying its bills.
Treasury Secretary Janet L. Yellen has warned lawmakers that the United States could run out of cash by June 1 if it fails to raise or suspend the debt ceiling.
How much debt does the United States have?
Last year, the nation’s debt topped $31 trillion for the first time. The debt ceiling is set at $31.381 trillion.
Why does the US have a debt ceiling?
Under the Constitution, government borrowing must be authorized by Congress. In the early 20th century, the debt ceiling was created so that the Treasury wouldn’t have to seek congressional approval every time it issued bonds to pay its bills.
During World War I, Congress passed the Second Freedom Bond Act of 1917, which gave the Treasury more authority to issue bonds and manage the federal finances. The debt ceiling began to take shape in 1939, when Congress combined different limits on various types of bonds into a single debt ceiling. The debt limit was set at $45 billion that year.
While the debt ceiling is designed to make government more efficient, many policymakers see it as causing more trouble than good. In 2021, Yellen said she supported lifting the debt ceiling.
What happens if the debt ceiling cannot be raised or suspended?
If the government runs out of cash and is no longer available through conventional measures, it cannot issue new debt. That means the government won’t have enough money to pay its bills, including interest and other payments due to bondholders, military salaries, and retirement benefits.
No one can predict for sure what will happen when the U.S. gets to that point, but if the government can’t make the necessary payments to bondholders, it could lead to a default. Economists and Wall Street analysts have warned that such an outcome would be devastating to the economy and could trigger a financial crisis around the world.
Can payments to military salaries, social Security benefits and bondholders be made?
A number of ideas have been floated to ensure that important spending is met, not least by paying US Treasury holders on schedule. But there is no precedent for any of this, and it is not certain that the government can really make any payments without borrowing more.
There is a proposal to let the Treasury prioritize certain payments to avoid a default on America’s debt. In that case, the Treasury would pay Treasury-holders first, even if it were to delay other expenses, such as government payroll or retirement benefits.
For now, the Treasury does not appear to be considering such a move, which Ms Yellen has said would not be seen by the markets as averting a debt “default”.
“The fiscal system is there to pay all our bills as they come due, not to pick and choose one type of spending over another,” Ms. Yellen told reporters earlier this year.