On January 19, 2023, the U.S. government officially reached its debt limit. In a formal letter to Congress, Treasury Secretary Janet Yellen informed lawmakers that the Treasury Department would begin to take “extraordinary measures” in order to make the country’s loan payments until Congress reaches an agreement (source). Since taking a narrow majority in the 2022 midterm election, House Speaker Kevin McCarthy has been under pressure from his Republican colleagues to refuse to raise the debt ceiling without making cuts to the federal budget, complicating negotiations and leaving the future of the debt ceiling unclear.
What is the debt ceiling/debt limit? Just like you and I, the government has a budget. When the federal government spends more than it makes (primarily through taxes), it’s called a deficit. To pay for the difference, the federal government takes out loans. The Treasury Department is in charge of government borrowing. How does the government borrow money? They sell Treasury securities to investors. Essentially, a Treasury security is an IOU from the government. The Treasury says, “if you give me some money today, I’ll pay you back some greater amount later on,” and then uses that cash to pay off our debts. However, Congress sets a limit on how much the Treasury can borrow by law (source). This is known as the debt ceiling or debt limit. That’s why so much attention is on lawmakers throughout this process. Ultimately, it is up to Congress to decide whether the Treasury can borrow more to pay the government’s debts.
The debt limit has been a source of debate mainly due to ideological differences about government spending. As a result, members of Congress disagree on what to do about the debt limit. There are three options (source). One, raise the debt limit by a specific dollar amount, freeing the Treasury to borrow again. According to Federal Research Chairman Jerome Powell, “there is only one way forward here, and that is for Congress to raise the debt ceiling so that the United States can pay all of its obligations when due” (source). Two, suspend the debt limit for a specified period of time. During this time period, the Treasury can borrow, and at its conclusion, the new limit becomes the sum of the existing debt limit and the amount the Treasury borrowed during the suspension period. Suspending the limit buys Congress time to agree on a longer-term solution without forcing the Treasury to halt borrowing and risk defaulting on its loans. Three, get rid of the limit all together, preventing a future failure to raise the debt ceiling. In testimony to the U.S. House Committee on the Budget last month, Louise Sheiner of the Brookings Institution cited ineffectiveness at imposing fiscal discipline on Congress, negative consequences of future failures to raise the debt ceiling, and long-term economic challenges as key reasons to consider eliminating the debt limit entirely (source).
The bottom line is that as long as the debt limit remains at its current level or without suspension, the Department of the Treasury will eventually reach a point where it can no longer meet its financial obligations. Reaching this point could lead to a number of serious effects on the economy. Marc A. Thiessen, Senior Fellow at the American Enterprise Institute paints a bleak picture stating that “the stock market could plummet, interest rates could skyrocket, our national credit rating could be downgraded, millions of jobs could be lost and inflation could climb even further” (source). The truth is nobody really knows what would happen if Congress doesn’t raise the debt ceiling, but the verdict among experts is that nobody really wants to find out because it’s unprecedented and definitely negative.