Several readers have asked about the debt ceiling and what might happen if Congress doesn’t raise it in time. We CHECK answers to 5 key questions.
The United States reached its debt ceiling, also known as the “debt ceiling”, on Thursday, January 19, prompting the Treasury Department to take “extraordinary measures” to continue paying the federal government’s bills.
Several readers, such as Ryan and Cathy, reached out to CHECK, asking questions about the debt ceiling, including when it was last raised and how the national debt is calculated.
Here are the VERIFIED answers to five key debt ceiling questions.
WHAT WE FOUND
What is public debt?
Before we answer what a debt ceiling is, we need to understand the national debt.
The national debt, which currently stands at roughly $31.5 trillion, is the amount of money the federal government has borrowed to cover spending.
Kathleen Day, professor of finance at the Johns Hopkins Carey School of Business, has described the national debt as “an accumulation of deficits over the years.”
A budget deficit is the result of the government spending more money than it receives in tax revenue and other sources in a given year. The Treasury then has to borrow money to keep the federal government paying its bills.
What is the debt ceiling?
The current federal debt limit, also known as the debt ceiling, is $31.4 trillion.
But what is a debt ceiling? This is a limit set by Congress on the amount of money the federal government can borrow to meet its existing legal obligations. Those obligations include social security and medical assistance benefits, military wages, interest on the public debt, tax refunds and other payments, the Treasury Department said in a statement.
Increasing or suspending the debt limit does not authorize new spending and does not cost taxpayers money, Treasury Secretary Janet Yellen wrote in a Jan. 13, 2023 letter to Congress.
According to the Committee on a Responsible Federal Budget (CRFB), the debt limit was set in 1917 by the second Liberty Bond Act.
Before the debt ceiling was set, “debt micromanagement was done by Congress, not by the Treasury,” explained Louise Scheiner, a fellow at the Brookings Institution.
More from CHECK: Yes, Republicans in the House of Representatives introduced a bill to create a national sales tax, eliminating the need for an IRS.
When was the last time the debt ceiling was raised?
CHECK Reader Ryan asked if the debt ceiling was last raised during the administration of former President Barack Obama. The debt ceiling was actually raised very recently.
In December 2021, Congress passed legislation raising the debt ceiling by $2.5 trillion to its current cap of about $31.4 trillion.
Congress has approved more than 100 separate debt ceiling changes since the end of World War II, according to a November 2022 Congressional Research Service (CRS) report. Since 2001, the debt ceiling has been raised 20 times.
“Increased spending on old-age and retirement programs, declining tax revenues, and federal government activity related to the Great Recession and the response to the COVID-19 pandemic have all contributed to rising levels of debt,” the CRS report said.
What happens when the US hits the debt ceiling?
When the US hits the debt ceiling, as it did in 2023, that doesn’t mean it won’t automatically meet its obligations, such as Social Security and Medicare benefits.
While the Treasury can’t borrow more money once it hits the debt ceiling, it can take what it calls “emergency measures” to keep paying the federal government’s bills. The Treasury indicated that it began taking these measures on January 19, 2023.
Those measures include things like suspending contributions to civil servants’ pension funds and then replacing the money, Scheiner explained. But these measures won’t affect the average American’s wallet in everyday life, she said.
“Emergency measures are just a way to get around the debt ceiling,” Scheiner said.
What can happen if Congress does not raise the debt ceiling in time?
It’s unclear exactly what will happen if Congress doesn’t reach an agreement on the debt ceiling in time and the Treasury runs out of cash.
“[The Treasury is] basically faced two sets of conflicting laws: they can’t borrow, and they have to make those payments — interest payments, Social Security recipients, hospitals that cover Medicare recipients,” Scheiner said.
In the event of a default, the federal government may have to skip or delay payments, such as payments to Social Security and Medicare recipients, as well as government employees’ salaries, Shainer and Day explained.
The federal government “has not experienced a major default on its financial obligations since the War of 1812,” the Bipartisan Policy Center said in a statement.
Financial experts such as Day warn that if the federal government fails to meet its obligations, the consequences could be disastrous.
According to Day, a default would “ruin our reputation” in the global economy, and the cost of domestic borrowing would rise “astronomically.” She added that this would also likely send the stock market down and could cost millions of jobs.
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