It seems there’s always a big looming fight in Washington, with finances typically mixed somewhere in the middle of the argument. But when it comes to the debt ceiling, it’s all about money. And right now, Republicans and Democrats seem to be on a collision course.
The debt ceiling, at its core, limits the amount the federal government can borrow to pay its bills. While there’s usually some partisan grumbling when it comes time to renew it, the parties generally get the issue worked out. This year, though, that’s not so certain.
Republicans want to fold spending cuts into the deal. President Biden has said he will not accept that. And while the parties are still talking, they don’t appear to be close on the issue.
It’s a complex issue that could have ramifications on millions of Americans. Here’s what you need to know as negotiations go down to the wire.
What is the debt ceiling?
The federal government operates in a deficit, spending more than it brings in with taxes, so it’s forced to borrow money to pay for everything from the salaries of armed forces and federal employees to Social Security
Congress has the power of the purse strings, letting it set a limit on what the government can borrow to pay for expenses (the debt ceiling). The current limit is $31.4 trillion.
What happens if the debt ceiling is not raised or suspended?
Treasury Secretary Janet Yellen has said that a failure to raise the debt ceiling would result in “economic chaos,” saying a “steep economic downturn” would hit the U.S..
If the limit is not raised or suspended, no one knows exactly what will happen. Economists beyond Yellen note it could well result in a global financial crisis. In the U.S., a debt default could impact several groups, including:
Social Security recipients: Payments could be delayed in the event of a default, though the program’s trust fund could possibly avoid that.
Federal employees/veterans: Over 2 million civilian workers and 1.4 million active-duty military personnel might see their paychecks delayed—and veterans who receive disability payments and pensions could be affected as well.
Borrowers: If you think mortgage and credit card interest rates are high now, wait until a default. Those percentages are based on Treasury yields, meaning they’d likely spike beyond what they have due to Federal Reserve rate hikes. It will also be harder to get approved for a loan for many people who need loans.
When does the U.S. hit spending limit?
It already has. The government hit the limit on Jan 19, but the Treasury Department began using “extraordinary measures” (accounting tools at its disposal) to keep paying the bills. Yellen has said that even with those, the U.S. will run out of money by June 1.
How many times has the debt ceiling been raised?
Since the 1960s, there have been roughly 80 deals to raise the debt ceiling or suspend the borrowing cap.
How much has the U.S. debt increased in the past 20 years?
The U.S. actually had a budget surplus during the Clinton era, but after 9/11, expenses began to rack up. The Great Recession of 2008 made things even worse, then the pandemic saw the deficit explode. In the last 20 years, U.S. debt has increased nearly 400%.
What caused the debt?
The U.S., for most of its history, has run a deficit, but in the past several years, expenses tied to the pandemic, the wars in Afghanistan and Iraq and the costs associated with an aging population have caused the spending to spike. Tax revenue has not kept pace, in part due to tax cuts by previous administrations.
The biggest expenses are things like Social Security and Medicare, which are considered “mandatory spending” (in that they do not need to be approved every year). Among discretionary expenditures, which makes up about 30% of federal spending, military spending is the biggest contributor.
Finally, there’s interest. Rates have been low in recent years, much as mortgage rates have, but as the Federal Reserve has increased interest rates, the U.S. has owed more on its interest payments, which now are around 6%. During the last fiscal year, the government spent more on interest payments than it did on transportation, housing or food and nutrition services combined.
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Chris Morris
Chris Morris is a veteran journalist with more than 30 years of experience, more than half of which were spent with some of the Internet’s biggest sites, including CNNMoney.com, where he was Director of Content Development, and Yahoo! Finance, where he was managing editor. Today, he writes for dozens of national outlets including Digital Trends, Fortune, and CNBC.com.
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