Everything you need to know about the debt ceiling

Washington is headed for another major battle to do so raise or suspend the nation’s debt limit, which limits the amount of money the federal government can borrow to pay its obligations.

This year promises the toughest fight in at least a decade.

- Advertisement -

Republicans are calling for the debt limit increase to be accompanied by spending cuts and other savings.

President Joe Biden He said he will oppose any attempt to link government spending cuts to raising the debt ceiling, raising the likelihood of a prolonged confrontation.

The president will meet with Republican and Democratic leaders at the White House on May 9 to discuss the way forward.

But it’s not yet clear how quickly lawmakers will move to raise the nation’s debt limit.

Here’s what to know about your debt limit and what will happen if you don’t reach a deal:

What is the debt limit?

The debt limit is a limit on the total amount of money the United States can borrow to fund the government and meet its financial obligations.

Since the United States has a budget deficit, which means that it spends more than it takes in through taxes and other revenues, it must ask huge loans to pay off your financial obligations.

These include the financing of social protection programs, interest on public debt and the salaries of the country’s armed forces.

The debt ceiling debate often prompts lawmakers to call for cuts in government spending, but raising the debt limit does not authorize any additional spending and, in fact, only allows the United States to spend money on programs that are already been approved by Congress. .

When was the loan limit reached?

Officially, the United States reached its debt limit on January 19, prompting the Treasury Department to use accounting maneuvers known as extraordinary measures to continue paying government obligations and avoid debt default.

These measures temporarily halt some government investments so the nation can continue to pay its bills.

The ability to use such measures to delay a debt default could end in June.

The Secretary of the Treasury Janet Yellen He warned lawmakers on Monday that the US could run out of cash by June 1 if the lending limit isn’t lifted or suspended.

How much is the US debt?

The national debt has passed for the first time 31 trillion dollars last year.

The debt ceiling is $31.381 billion.

Why does the US have a lending limit?

Under the terms of the Constitution, Congress must authorize all nationwide loans.

The debt limit was established in the early 20th century so that the Treasury would not have to ask for permission every time it needed it. issue bonds settle accounts.

During World War I, Congress passed the Second Liberty Loan Act of 1917 to give the Treasury more flexibility in issuing debt and managing federal finances.

The debt limit began to take its present form in 1939, when Congress consolidated several limits that had been placed on different types of bonds into a single debt limit.

So, the limit was 45,000 million dollars.

While the debt limit was created to make government run more smoothly, many lawmakers believe it has become more of a problem than a solution. In 2021,

Yellen has stated that she is in favor of to abolish the debt limit.

What happens if the debt limit is not raised or suspended?

If the government exhausts all its extraordinary measures and runs out of liquidity, it will not be able to issue new debt instruments.

That means you wouldn’t have enough money to pay off your bills, including the interest and other payments you owe to bondholders, the military, and retirees.

No one knows exactly what would happen if the United States gets to this point, but the government could end up defaulting on its debt if it doesn’t make required payments to bondholders.

Some economists and Wall Street analysts warn that this scenario it would be devastating economically and could plunge the whole world into a financial crisis.

Will military salaries, social security benefits and bondholders be paid?

Various ideas have been put forward for warranty that critical payments are not lost, especially for investors who hold US debt.

But none of these ideas have been tested, and it is unknown whether the government will actually be able to continue paying its obligations if it cannot take on more loans.

One idea that has been put forward is that the Treasury Department prioritizes certain payments to avoid default on US debt.

In that case, the Treasury would first pay bondholders who hold US Treasury debt, even if it delays other financial obligations such as government salaries or retirement benefits.

So far, the Treasury appears to have ruled out that option.

Yellen said such an approach would not prevent a debt “default” in the eyes of the markets.

“All treasury systems were built to pay all of our bills when they’re due and on time and not to prioritize one form of expense over another,” Yellen told reporters a few months ago.

c.2023 The New York Times Society