The debt ceiling is the legal limit on how much the US government can borrow to pay for its existing obligations, such as social security benefits, military salaries, interest on the national debt, and tax refunds. The current debt limit is $31.4 trillion, which was set by Congress on December 16, 2021.
The debt ceiling does not authorize new spending; it only allows the government to finance what Congress has already approved. However, if the debt limit is not raised or suspended by Congress, the Treasury Department will run out of cash and borrowing authority to pay all of the government’s bills on time. This would cause the US to default on its legal obligations for the first time in history, with potentially catastrophic consequences for the economy and global financial stability.
What is the current situation and what are the risks?
The Treasury Department has been using “extraordinary measures” since May 1, 2023, when the previous suspension of the debt limit expired, to keep paying the government’s bills without exceeding the debt limit. These measures include suspending investments in certain federal retirement and health funds, redeeming existing Treasury securities, and issuing more short-term debt. However, these measures are expected to be exhausted by early June 2023, according to Treasury Secretary Janet Yellen.
If Congress does not act by then, the Treasury will have to rely on its cash balance and incoming revenues to meet its obligations. However, these sources may not be sufficient or predictable enough to cover all of the government’s payments, especially during periods of low tax receipts or high spending. This could force the Treasury to prioritize some payments over others, such as interest on the debt or social security checks, or delay payments altogether. Either scenario would damage the government’s creditworthiness and reputation, increase borrowing costs for taxpayers and businesses, disrupt financial markets and economic activity, and erode public trust and confidence in the US dollar.
What are the possible solutions and what are the challenges?
The simplest and most straightforward solution is for Congress to raise or suspend the debt limit before it becomes a problem. This has been done 78 times since 1960, under both Democratic and Republican presidents and Congresses. However, raising or suspending the debt limit has often been a contentious political issue, with some lawmakers demanding spending cuts or policy concessions in exchange for their support. This has led to several close calls and crises in the past, such as in 2011 and 2013, when the US credit rating was downgraded and a government shutdown occurred.
Another possible solution is to abolish or reform the debt limit altogether, as some economists and experts have suggested. They argue that the debt limit is an unnecessary and outdated constraint that does not affect the level of spending or debt, but only creates uncertainty and risk for no benefit. They propose alternatives such as linking the debt limit to the budget process, delegating the authority to raise it to the executive branch, or replacing it with a fiscal rule or target that would better reflect fiscal sustainability and responsibility.
However, any change to the debt limit would require legislation from Congress and approval from the president, which may not be feasible or desirable given the current political environment and preferences. Therefore, unless there is a major shift in attitudes or incentives among policymakers and stakeholders, the debt limit is likely to remain a source of conflict and uncertainty for the foreseeable future.
Summary
The US debt ceiling is a legal limit on how much the government can borrow to pay for its existing obligations. If it is not raised or suspended by Congress by early June 2023, the US could default on its payments for the first time in history, with severe consequences for the economy and global financial stability.
