What is the US debt ceiling and what happens if it isn’t raised? | US economy

The US government has hit its borrowing limit, known as the debt ceiling, marking the beginning of what looks to be a vicious fight over the government’s budget and one that threatens to worsen an already precarious economic outlook.

The US treasury secretary, Janet Yellen, has said “extraordinary measures” are now being put in place to prevent the United States from defaulting on its obligations – essentially moving some money around so the government does not default just yet. Those measures will last a few months, but if the limit is ultimately not raised, the federal government will run out of funds.

Here is more on the debt ceiling and what it means for the federal government.

What is the debt ceiling?

Congress has the ability to set a limit on how much the US government can borrow to pay for its expenses. This limit is called the debt ceiling, and right now the limit is $31.4tn. Borrowing money helps the federal government pay for expenses passed in its budgets, like social security and Medicare benefits and the salaries of US military service members.

What happens if the debt ceiling isn’t raised?

If Congress does not raise the debt ceiling in the coming months, things will quickly go south for the economy, Yellen warned.

“Failure to meet the government’s obligations would cause irreparable harm to the US economy, the livelihoods of all Americans, and global financial stability,” she wrote.

If the federal government defaults on its loans, investors could lose faith in the US dollar, causing the US dollar to weaken, stocks to fall and triggering job cuts.

Even if the debt ceiling is raised, a prolonged fight over it could still cause long-term financial harm. During a particularly vicious debt-ceiling battle in 2011, credit rating agency Standard & Poor downgraded the US government’s credit rating for the first time in history, making it more costly for the US government to borrow money thereafter.

Why isn’t Congress raising the debt ceiling?

Republicans have a fresh majority in the House, and they see the debt ceiling as a possible bargaining chip for negotiating spending cuts.

The House speaker, Kevin McCarthy, said on Fox News Sunday that reaching the debt ceiling is a test for the party on its commitment to cutting spending.

“You couldn’t just keep increasing it,” he said. “Let’s sit down and change our behavior for the good of America. Because what we’re going to do is bankrupt this country and bankrupt these entitlements if we don’t change their behavior today.”

The White House press secretary, Karine Jean-Pierre, said the administration would not be doing “any negotiations”.

“It should be … done without condition,” she said.

With Republicans holding on to the necessary votes needed to lift the ceiling, the fight to raise it could get ugly.

In a joint statement, the Senate majority leader, Chuck Schumer, and the House minority leader, Hakeem Jeffries, said Democrats want to move quickly on passing a new debt ceiling.

“We’ve seen in previous debt ceiling standoffs that even the threat of default leads to even higher costs for working families,” they said. “Default forced by extreme Maga Republicans could plunge the country into a deep recession.”

What do Republicans want?

Exactly how much Republicans want to cut, and what they want to target, is still unclear. And while Republicans often rally against government spending, raising the debt ceiling funds government expenses that have already been passed by Congress. Not being able to borrow more money will put existing federal programs at risk.

But Republicans, particularly the more conservative members of the party, are gearing themselves up for a battle over the ceiling.

Some are even thinking Republicans can push for a payment prioritization plan that would call on the Biden administration to make only critical federal payments, like social security and Medicare. The Washington Post reported that McCarthy privately made a deal with conservative Republicans when he was fighting to get the speaker title to pass a prioritization plan in the first quarter of the year. The details of the plan are not set but make clear that Republicans are gunning for cuts.

Responding to the Post’s report of the plan, the White House chief of staff, Ron Klain, tweeted that Republicans want to make “payments to wealthy foreign bondholders” in lieu of funding other federal programs like national parks and food stamps.

Why does the debt ceiling exist?

Experts have pointed out for years that there is no good reason why the debt ceiling exists and that raises should be routine. Few other nations have similar limits, and in recent history, it has largely been a political negotiating chip between parties – one that carries heavy consequences.

What happens next?

Expect months of wrangling and leaks. The Republican plan is not yet clear but it is clear that the newly empowered party – and especially its more conservative wing – wants to make its mark.

Fights to raise the debt ceiling have led to government shutdowns in the past. The longest-ever shutdown was 35 days between 22 December 2018 and 25 January 2019 at a cost of $11bn – $3bn of which was permanent.

So far stock markets do not seem to be rattled, suggesting investors think this is another war of words. Over the next few months, that could change.

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