The federal government is set to hit its borrowing limit Thursday, setting off what is likely to become a showdown between warring factions in the House of Representatives.
The government’s debt limit, a cap that Congress places on the amount the federal government is allowed to borrow, will be reached sometime Thursday and Congress will have to grapple with the notion of raising that cap as it has some 100 times since the limit was enacted in 1917.
House Republicans say spending levels and the current debt threatens economic recovery as inflation has hit its highest level in decades. Many in the party are calling for major cuts in spending.
The Biden White House says Republicans are holding the debt ceiling increase hostage to cuts they want to see.
“They’re threatening to kill millions of jobs and 401(k) plans by trying to hold the debt limit hostage unless they can cut Social Security, cut Medicare, cut Medicaid,” Karine Jean-Pierre, the White House press secretary, said in a briefing Wednesday.
Treasury Secretary Janet Yellen wrote a letter to Congress warning the Treasury will have to take “extraordinary measures” to prevent the U.S. from defaulting on its obligations.
What is the debt limit, what happens if it isn’t raised? Here’s what we know now:
What is the debt limit?
The debt limit, sometimes called the debt ceiling, is the maximum amount the United States can borrow to pay the government’s debts. The debt limit covers more than 99% of all federal debt.
Why does the federal government have debt?
The government spends vast amounts of money each day. Already in fiscal year 2023, which started in October 2022, the federal government has spent $1.45 trillion.
Federal programs, including Social Security, Medicare, and the Supplemental Nutrition Assistance Program (food stamps), are funded with money collected from taxes. When the government spends more on programs than it brings in in taxes and other revenue, it must borrow money to pay for those programs.
What does it mean to raise the debt limit?
To raise the debt limit means allowing the government to borrow more money to fund the programs currently in place.
Congress must approve any increase in the limit.
What does it mean if Congress fails to raise the debt limit?
“Every item of federal spending is going to be affected — whether you’re talking about payments that individuals receive, federal benefits, paychecks to civilian and military employees, grants to state and local governments — all of these are going to be touched,” Paul Van de Water, a senior fellow at the Center on Budget and Policy Priorities, told Fortune the last time there was a debate on raising the debt ceiling.
Included in that list are programs such as Social Security, Medicare and Medicaid, plus the paychecks of 1.4 million members of the U.S. military and nearly 3 million government employees.
Grants that states receive that cover things like school programs, Medicaid and public transit would dry up.
Nearly a third of the money states spend comes from the federal government.
Why approve a debt limit increase?
Approval of a debt limit increase allows the federal government to pay the nation’s bills and maintain the full faith and credit of the U.S. government – or the reputation of the country to pay its bills.
If an individual fails to pay his or her bills, they become a credit risk, meaning it is more difficult to borrow money because creditors are not sure they will be paid back.
The same things happen when a country cannot pay its bills. Its credit rating falls and borrowing money becomes more expensive because the government will be charged a higher rate of interest on loans.
What are the arguments for and against borrowing more money?
Some House Republicans want to tie legislation to raise the debt limit to federal spending cuts.
“Look, you only have so many leverage and negotiating points. The debt ceiling is one of those. Nobody in America wants us to blindly just raise the debt ceiling again if we don’t get structural reforms around here. Nobody wants that,” Rep. Chip Roy, R-Texas, told reporters last week.
On the other side, Sen. Brian Schatz, D-Hawaii, said Democrats were not interested in negotiation.
“In exchange for not crashing the United States economy, you get nothing,” Schatz said about Republicans’ request for Democrats to join them at the negotiating table.
“We have to tell them there is no table,” Schatz said.
If the limit is not raised, what will the Treasury Department do?
The Treasury can take several steps to ensure the nation’s bills will be paid, at least for a while.
According to the agency, “two extraordinary measures Treasury anticipates implementing this month are (1) redeeming existing, and suspending new, investments of the Civil Service Retirement and Disability Fund (CSRDF) and the Postal Service Retiree Health Benefits Fund (Postal Fund), and (2) suspending reinvestment of the Government Securities Investment Fund (G Fund) of the Federal Employees Retirement System Thrift Savings Plan.”
While the Treasury Department can take these actions, without congressional action, the U.S. could face a default on its debts as soon as June.
What is the debt limit now?
The debt limit today stands at $31.3 trillion.
When was the last time it was increased?
The last time the debt ceiling was lifted (increased) was in December 2021.
What is the difference between a debt-limit increase and a shutdown of the federal government?
A shutdown of the government happens when annual funding for ongoing federal government operations expires and Congress does not renew it by Oct. 1, the first day of the fiscal year.
Failure to raise the debt ceiling means the government cannot borrow money to pay for government programs.
