{"id":44764,"date":"2023-01-20T19:10:27","date_gmt":"2023-01-20T19:10:27","guid":{"rendered":"http:\/\/www.brandon.ddtest.info\/multisite-test\/what-happens-when-the-u-s-hits-its-debt-ceiling\/"},"modified":"2023-01-20T19:10:27","modified_gmt":"2023-01-20T19:10:27","slug":"what-happens-when-the-u-s-hits-its-debt-ceiling","status":"publish","type":"post","link":"http:\/\/www.brandon.ddtest.info\/multisite-test\/what-happens-when-the-u-s-hits-its-debt-ceiling\/","title":{"rendered":"What Happens When the U.S. Hits Its Debt Ceiling?"},"content":{"rendered":"

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Introduction<\/h2>\n

Congress has authorized trillions of dollars in spending over the last decade, causing the United States\u2019 debt to nearly triple since 2009. Over that period, the Treasury Department\u2019s ability to borrow money to make payments on that debt has repeatedly run into a congressionally mandated limit on borrowing known as the debt ceiling.\u00a0<\/p>\n

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\n The 118th Congress by the Numbers
\n <\/a>\n <\/div>\n<\/p><\/div>\n<\/p><\/div>\n<\/section>\n

Efforts to raise or abolish the ceiling have become a topic of heated debate among policymakers; some lawmakers who decry government debt have used negotiations on altering the limit to try to force spending cuts. The congressional brinkmanship over the issue has increasingly led to disruption, including government shutdowns, and the specter of default that has threatened to push the economy into crisis. With the issue again on the table in 2023 under President Joe Biden, economists are warning of catastrophic consequences if the Treasury Department can no longer pay the nation\u2019s debts.<\/p>\n

What is the debt ceiling?<\/h2>\n
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More on:<\/p>\n

\n United States<\/a>\n <\/p>\n

\n Budget, Debt, and Deficits<\/a>\n <\/p>\n

\n Sovereign Debt<\/a>\n <\/p>\n

\n Renewing America<\/a>\n <\/p>\n<\/section>\n

Created by Congress in 1917, the debt limit, or ceiling, sets the maximum amount of outstanding federal debt the U.S. government can incur. As of January 2023, the total national debt and the debt ceiling both stand at $31.4 trillion. The U.S. government has run a deficit averaging nearly $1 trillion<\/a> every year since 2001, meaning it spends that much more money than it receives in taxes and other revenue. To make up the difference, it has to borrow to continue to finance payments that Congress has already authorized.<\/p>\n

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Congressional action to raise the debt ceiling does not increase the nation\u2019s financial commitments, as decisions to spend money are legislated separately. Any change to the debt ceiling requires majority approval by both chambers of Congress.<\/p>\n

How often has it been raised?<\/h2>\n

Raising or suspending the debt ceiling becomes necessary when the government needs to borrow money to pay its debts. For much of the past century, raising the ceiling has been a relatively routine procedure for Congress. Whenever the Treasury Department could no longer pay the government\u2019s bills, Congress has acted quickly<\/a> [PDF] and sometimes unanimously to increase the limit on what it could borrow. Since 1960, Congress has increased<\/a> the ceiling seventy-eight times, most recently in 2021. Forty-nine of these increases were implemented under Republican presidents, and twenty-nine were under Democratic presidents.\u00a0<\/p>\n

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More From Our Experts<\/p>\n

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\n The 118th Congress by the Numbers
\n <\/a>\n <\/div>\n<\/p><\/div>\n<\/p><\/div>\n<\/section>\n

Congress can also choose to suspend the debt ceiling, or temporarily allow the Treasury to supersede the debt limit, rather than raise it by a specific amount. While this move was rare during the first ninety years of the ceiling\u2019s existence, Congress has suspended the debt limit seven times since 2013.<\/p>\n

A new chapter of debate over the debt ceiling began in 2011, when sparring over spending between President Barack Obama and congressional Republicans resulted in a protracted deadlock. Congress eventually reached a deal to raise the ceiling just two days before the date that the Treasury estimated it would run out of money. However, the brinkmanship triggered the most volatile week for U.S. stocks since the 2008 financial crisis, and the credit rating agency S&P Global Ratings downgraded the United States\u2019 creditworthiness for the first and only time ever. TheGovernment Accountability Office, which serves as the federal auditor, estimated that the delay in reaching a deal increased U.S. borrowing costs by $1.3 billion<\/a> [PDF] that year alone.<\/p>\n

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More on:<\/p>\n

\n United States<\/a>\n <\/p>\n

\n Budget, Debt, and Deficits<\/a>\n <\/p>\n

\n Sovereign Debt<\/a>\n <\/p>\n

\n Renewing America<\/a>\n <\/p>\n<\/section>\n

<\/p>\n

With U.S. political polarization<\/a> deepening over the last decade, votes to raise the debt ceiling have remained contentious, with congressional budget hawks increasingly demanding spending cuts in return for their support. When the debt ceiling was set to expire in 2013, debate over the limit forced the government into a shutdown, and in 2021, the issue again came down to the wire<\/a>. As policymakers once more deliberate an increase to the debt ceiling in 2023, President Biden has said he will settle for nothing less than a no-strings-attached increase. Meanwhile, Republicans have used their majority in the House of Representatives to condition a debt ceiling increasing on reductions in federal spending.\u00a0<\/p>\n

What would be the consequences if the United States breaches the debt ceiling?<\/h2>\n

The debate over the debt ceiling has caused economists such as CFR\u2019s Roger Ferguson to consider<\/a> the once unthinkable prospect of a U.S. default\u2014that is, Washington declaring that it can no longer pay its debts. Some experts say that would herald chaos for the U.S. and global economies. Even short of default, hitting the debt ceiling would hamstring the government\u2019s ability to finance its operations, including providing for the national defense or funding entitlements such as Medicare or Social Security.<\/p>\n

Potential repercussions of reaching the ceiling include a downgrade by credit rating agencies, increased borrowing costs for businesses and homeowners alike, and a dropoff in consumer confidence that could shock the U.S. financial market and tip the economy into recession. Goldman Sachs economists have estimated that a breach of the debt ceiling would immediately halt<\/a> about one-tenth of U.S. economic activity. According to center-left think tank Third Way, a breach that leads to default could cause the loss of three million <\/u>jobs<\/a>, add $130,000 to the cost of an average thirty-year mortgage, and raise interest rates enough to increase the national debt<\/a> by $850 billion. In addition, higher interest rates could divert future taxpayer money away from much-needed federal investments in such areas as infrastructure, education, and health care.<\/p>\n

\u201cFailure to meet the government\u2019s obligations would cause irreparable harm to the U.S. economy, the livelihoods of all Americans and global financial stability,\u201d Treasury Secretary and former Federal Reserve Chair Janet Yellen wrote to Congress<\/a> [PDF] in January 2023.<\/p>\n

Could breaching the U.S. debt ceiling bring down other markets?<\/h2>\n

Experts say a U.S. default could wreak havoc on global financial markets. The creditworthiness of U.S. treasury securities has long bolstered demand for U.S. dollars, contributing to their value and status as the world\u2019s reserve currency<\/a>. Any hit to confidence in the U.S. economy, whether from default or the uncertainty surrounding it, could cause investors to sell U.S. treasury bonds and thus weaken the dollar.<\/p>\n

Over half of the world\u2019s foreign currency reserves are held in U.S. dollars<\/a>, so a sudden decrease in the currency\u2019s value could ripple through the market for treasuries as the value of these reserves drops. As heavily indebted low-income countries struggle to make interest payments<\/a> on their sovereign debts, a weaker dollar could make debts denominated in other currencies relatively more expensive and threaten to tip some emerging economies into debt crises.<\/p>\n

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Many U.S. exporters could benefit from dollar depreciation because it would increase foreign demand for their goods by effectively making them cheaper. Yet, the same firms would also bear higher borrowing costs from rising interest rates. Dollar instability could also benefit aspiring great-power rivals such as China. Though Beijing has long sought to position its renminbi as a global reserve, the currency accounts for under 3 percent of the world\u2019s allocated foreign reserves.<\/p>\n

Does the government have any options if the ceiling is not raised?<\/h2>\n

If congressional negotiations over the debt ceiling are not resolved before the ceiling is reached, the Treasury can stave off a default for several months with a series of temporary actions it calls \u201cextraordinary measures.\u201d These include suspending payments to some government employee savings programs, underinvesting in certain government funds, and delaying auctions of securities.\u00a0<\/p>\n

While the Treasury has used these measures when previous negotiations stalled\u2014including in 2011 and 2013\u2014Congress has never failed to raise the ceiling before the measures have been depleted. If Congress does not act to raise the debt limit despite such emergency measures, federal spending would have to plummet or taxes would have to rise significantly (or a combination of the two). In 2023, the debt ceiling was reached without a deal on January 19; the Treasury Department says it expects extraordinary measures to keep the government afloat until June. Experts have viewed both reducing federal spending and increasing tax revenue enough to cover the needed payments as processes that could take over a decade<\/a>.<\/p>\n

Despite the cushion of extraordinary measures, long impasses over the debt ceiling can be enough to shake investor confidence. The Treasury Department has warned<\/a> [PDF] that \u201cpolitical brinksmanship that engenders even the prospect of a default can be disruptive to financial markets and American businesses and families.\u201d<\/p>\n

Do other countries have similar policies?<\/h2>\n

Few countries maintain debt ceilings, and nowhere else do the limits regularly threaten serious economic disruption. Denmark has one, but it is so much higher than the country\u2019s spending that it has not posed a problem. In 2021, Denmark\u2019s central government debt was about 14 percent<\/a> of its ceiling. Australia introduced a debt limit in 2007 with the goal of legislatively mandating fiscal responsibility<\/a> amid large budget deficits. The ceiling was raised several times before being repealed in 2013. Poland\u2019s constitution caps spending at 60 percent of gross domestic product (GDP), but it does not limit borrowing.<\/p>\n

Should the debt ceiling be revoked?<\/h2>\n

Some analysts contend that by requiring legislative consent, the debt limit affords Congress some oversight authority and engenders fiscal accountability. The original 1917 legislation was meant to give the Treasury some autonomy over borrowing by allowing it to issue debt up to the ceiling without congressional approval for each issuance; prior to 1917, Congress authorized the Treasury to borrow in smaller increments. But in recent years, opposition parties have often used debt limit negotiations as leverage to influence policies not related to the ceiling itself.<\/p>\n

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\n \u201cIt is time for the United States to leave behind this antiquated mechanism that brings the country to the precipice of default every few years.\u201d<\/span>
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Roger Ferguson<\/span>, CFR Senior Fellow<\/span> <\/figcaption><\/figure>\n<\/div>\n

In 2023, many congressional Republicans have been concerned that growing budget deficits threaten the U.S. economy, and they have sought to tie their efforts to curtail spending to debt ceiling negotiations. \u201cIf you gave your child a credit card and they kept hitting the limit, you wouldn’t just keep increasing it. You would sit down with them to identify where they are overspending and where they can change their behavior,\u201d House Majority Leader Kevin McCarthy wrote on Twitter.<\/a> \u201cIt’s time for the federal government to do the same thing.\u201d<\/p>\n

But many economists and policymakers contend that the federal debt ceiling is anathema to sound fiscal policy, calling it unwise to inhibit the government\u2019s ability to meet already legislated financial obligations. Treasury Secretary Yellen falls into that camp, having argued that the debt ceiling is inherently harmful to the U.S. economy, because it functions primarily to restrict borrowing that finances previous commitments.\u00a0<\/p>\n

CFR\u2019s Ferguson agrees. \u201cCongress should eliminate the debt ceiling completely, or at least tie it to spending such that the debt limit increases automatically whenever a spending bill passes,\u201d he writes. \u201cIt is time for the United States to leave behind this antiquated mechanism that brings the country to the precipice of default every few years.\u201d<\/p>\n<\/div>\n