In January, the US hit its $31.4 trillion debt limit, meaning the federal government couldn’t bring in more bills (or borrow more money) — unless they raised or suspended the debt ceiling. Now, after weeks of negotiations, President Biden and House Republicans reached an agreement to raise the debt ceiling and cut spending.
How does the debt ceiling deal affect you? It’s a loaded question, so let’s pull back the layers. Here’s what you need to know.
What is the debt ceiling?
Established by Congress in 1917, the debt ceiling limits how much the U.S. can borrow to fund legal obligations imposed by legislators in the past (Social Security, tax refunds, military salaries, interest payments on outstanding debts, Medicare benefits, and more). In other words, it limits how much debt the US can take on. The current debt ceiling is $31.4 trillion.
What does reaching the debt ceiling mean?
Reaching the debt ceiling limit would not be a hot topic if the country’s revenues exceeded costs (the government receives money mainly from individual and corporate taxes, but also has other sources such as rents from government buildings and land, sales of natural resources and access to national parks).
However, the US has not been in the green since 2001, meaning the government has had to borrow money to fund operations for over 20 years. Now that the US has reached the debt limit, there are two options: raise the limit or suspend it so that the government can pay its bills on time or face bankruptcy.
Raising the debt ceiling would be exactly what it sounds like (raising the limit the US can borrow). Suspending the debt ceiling means the Treasury can temporarily breach the ceiling and borrow more above the current limit. If the US defaulted, the country would not be able to pay its bills on time and the economic fallout would likely be felt immediately.
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When is the deadline to raise or suspend the debt ceiling?
On Friday, Treasury Secretary Janet Yellen told lawmakers in May that by June 5, the US will run out of money to meet its financial obligations.
“We now estimate that the Treasury will have insufficient funds to meet the government’s obligations if Congress does not increase or suspend the debt limit by June 5,” Yellen wrote. in a letter to House Speaker Kevin McCarthy on May 26.
Fortunately, Biden and House Republicans reached an agreement in plenty of time.
What is the obstacle to raising or suspending the debt ceiling?
McCarthy and the Biden administration negotiated a deal to avoid federal bankruptcy after weeks of differing positions: McCarthy and House Republicans pushed for $3.6 trillion in budget cuts and limits on future spending on certain programs in exchange for a raise in the debt ceiling, while the Biden administration was focused on raising the limit and paying bills on time before agreeing to any cuts.
The billcalling for nearly $2 trillion in spending cuts in exchange for a two-year debt ceiling increase was sent to lawmakers Wednesday night and the House voted to approve the deal by a vote of 314 to 117.
The bill will now go to the Senate ahead of Monday’s default deadline. That vote could begin Friday.
“I can’t stress enough that we have no margin — no margin — for error,” Senate Majority Leader Chuck Schumer said on the Senate floor Wednesday. by CBS. “Either we move quickly and send this bipartisan agreement to the office of the president, or the federal government will default for the first time.”
He also sent a letter to members saying to “prepare for possible Friday and weekend votes”.
What would happen if the US defaults?
In March, Moody Analytics chief economist Mark Zandi said warned that if the US defaults, it would be “catastrophic” and that Americans would likely pay for “generations” for the default.
For example, government employees and companies with government contracts may not be paid on time and Social Security benefits may be stopped. In a broader sense, it would also lead to “a loss of confidence among consumers and businesses,” the spokesman said Brookings Institution analysts Wendy Edelberg and Louise Sheiner.
Would a bankruptcy cause a recession?
The bankruptcy would essentially trigger a nationwide economic collapse and trigger an “immediate, sharp recession,” according to the Council of Economic Advisers. warned the beginning of May.
Harry Mamaysky, professor of professional practice at Columbia Business School, explained ukbusinessupdates.com That the government has “many obligations to many people”.
“At some point, if there isn’t enough money, they have to start prioritizing who has to pay first,” Mamaysky said. “Someone isn’t getting paid the money they owe on time, and that’s going to be disruptive.”
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However, the short-term consequences of a default may not be nearly as damaging as the long-term consequences – what Mamaysky calls a “reputational problem” that could cast doubt on the US’s credibility as a smart country to do business with.
“That’s the biggest risk for me — it’s not what happens this year or next year, but in five to 10 years, will the world see the US as the best country in the world to do business?” he said. “It’s not imminent, but if Congress doesn’t look into it, they’re going to erode confidence.”
In May, top credit rating agency Finch placed the current “AAA” rating of the US below “rating watch negative”, meaning the country’s perfect score is at risk of being downgraded.
“The Rating Watch Negative reflects increased political bias that hinders the achievement of a resolution to raise or suspend the debt limit, despite the rapidly approaching x-date (when the U.S. Treasury exhausts its cash position and capacity for extraordinary measures without incurring new debt to to go).” Company said in a statement.
How does bankruptcy affect small businesses?
A recent report found by Goldman Sachs that 65% of small business owners would experience “adverse consequences” if the US defaulted on its debts. In addition, 90% said it was “very important” that the government should not default.
If the US defaults, companies with government contracts may not see payments, and stores whose customers rely on food stamps or Social Security to pay for their necessities may see their spending fall.
“If you are a Social Security recipient and owe rent, you may not have the money to pay rent,” Mamaysky added. “And if the landlord owes their building’s utility bill, they may not be able to pay the utility bill because they didn’t get the rent.”
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What’s more, one 2011 New York Federal Reserve Small businesses were hit hardest during the 2008-2009 recession, according to the report.
According to the report, banks become “more selective and risk averse” in lending in a recession, making it harder for individuals to get a small business loan.
“Small businesses, which are more dependent on outside financing and riskier, are more likely to be hit by a credit crunch,” researchers wrote.
How often has the debt ceiling been raised or changed?
Despite the current push to raise or suspend the debt ceiling, it is a relatively routine practice for the US government. Since 1960, Congress has taken action 78 times to raise, temporarily extend or revise the definition of the debt limit to avoid a default — 49 times under Republican presidents and 29 times under Democratic presidents, according to the Treasury, adding that “Congress leaders in both parties have recognized that this is necessary.”
For Wednesday, the most recent increase was in 2021, when the debt ceiling was raised by $2.5 trillion.
What is the 14th Amendment and what does it have to do with the debt ceiling?
The 14th Amendment covers equal protection and other rights such as citizenship, state taxes, and what Congress can regulate. The fourth section of the amendment, which deals with the national debt, states that the “validity of the national debt of the United States … shall not be called into question”.
Since the US has reached its debt ceiling and may not be able to pay its bills, there is one argument that by invoking the 14th Amendment, Biden has the legal authority to bypass Congress (which approves any action to raise or suspend the debt ceiling) and essentially continue to issue more debt through ignore the Treasury and the debt limit.
Biden was supportive but cautious about invoking the 14th Amendment as a solution.
“The question is whether it can be done and invoked in time so that it is not appealed, and as a result after the relevant date and still be in default on the debt? That is a question that I think should is unresolved,” Biden told reporters. on Sunday, per The Wall Street Journal.
Some experts have said the move would be unconstitutional.
“The Biden administration even flirting with these ideas really suggests that the administration’s allegiance to the Constitution is questionable or opportunistic,” Philip Wallach, a senior fellow at the center-right think tank American Enterprise Institute, told the Associated Press. Wall Street Journal.
Others have been a little more straightforward about their take on the idea, Yellen saying it’s a “constitutional crisisRep. Chip Roy said if Biden took the 14th Amendment route, House Republicans wouldto blow up.”