Washington is heading into another big battle over whether to raise or stop the national debt ceiling, which limits how much the federal government can borrow to pay its bills.
This year looks set to be one of the toughest battles in at least a decade. Republicans are calling for spending cuts and other cost cuts as the borrowing limit increases. President Biden has said he will oppose any attempt to link spending cuts to raising the debt ceiling, raising the prospect of a prolonged standoff.
The president is scheduled to meet with Republican and Democratic leaders at the White House on May 9 to discuss a path forward. However, it remains unclear how quickly lawmakers will act to raise the country’s borrowing ceiling.
Here’s what you need to know about debt limits and what to do if you can’t reach an agreement.
What is the loan limit?
The debt limit is the maximum amount that the United States is allowed to borrow to fund the government and meet its financial obligations.
Because the federal government runs a budget deficit, which means it spends more than it earns through taxes and other revenues, it has to borrow a lot to pay its bills. These obligations include social safety funding her net program, interest on government bonds, and the salaries of members of the armed forces.
As the debt ceiling approaches, lawmakers often call for cuts in government spending. But raising the debt ceiling doesn’t actually authorize new spending. In effect, it will only allow the US to spend on programs already approved by Congress.
When did you reach your debt limit?
As the United States officially reached its debt ceiling on January 19, the Treasury Department began using an accounting maneuver known as special measures to continue paying the government’s debt and avoiding default. rice field. These measures will temporarily curb certain government investments so that bills can continue to be paid.
The ability to delay default using these measures could be exhausted by June. Treasury Secretary Janet L. Yellen warned lawmakers on Monday that the U.S. could run out of cash by June 1 if the borrowing limit isn’t raised or stopped.
How Much Does America Debt?
Last year, the national debt exceeded $31 trillion for the first time. The borrowing limit he has set at $31.381 trillion.
Why does the United States have debt limits?
According to the constitution, Congress must approve government borrowings. In the early 20th century, debt limits were enacted so that the Treasury did not have to ask Congress for permission each time it had to issue debt to pay bills.
During World War I, Congress Second Liberty Guarantee Act of 1917 To give the Treasury more flexibility in issuing debt and managing federal finances. Debt limits began to take on their current form in 1939 when Congress consolidated the various limits placed on different types of bonds into a single borrowing limit. At the time, the limit was set at $45 billion.
The debt ceiling was created to make governments run more smoothly, but many policymakers believe it’s more trouble than it’s worth. In 2021, Yellen said she supports removing the debt ceiling.
What happens if my debt limit is not increased or stopped?
Once the government runs out of temporary measures and runs out of cash, it can no longer issue new bonds. That means you don’t have enough money to pay your bills, including interest and other payments to creditors, military salaries, and benefits for retirees.
No one knows exactly what will happen if the US gets to that point, but the government could default if it fails to make the required payments to bondholders. Economists and Wall Street analysts warn that such a scenario would be economically devastating and could plunge the entire world into a financial crisis.
Are military salaries, social security benefits, and bondholders paid?
Various ideas have been put forward to ensure that important payments, especially to investors holding US Treasuries, are not missed. None of these ideas have been tested, however, and it remains unclear whether the government can actually continue to pay the bills if it becomes unable to borrow more money.
One proposed idea is for the Treasury Department to prioritize certain payments to avoid defaulting on US debt. In that case, the Treasury will pay bondholders who own U.S. Treasury debt first, even if it delays other financial obligations such as government salaries and retirement benefits.
So far, the Treasury Department seems to have ruled it out as an option. Yellen said such an approach would not avoid a debt “default” in the eyes of the market.
“All financial systems are built to pay all bills on time and on time, not prioritizing one form of spending over another,” Yellen said. told reporters Earlier this year.
