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What is the Debt Ceiling?
The debt ceiling is the legal limit on the total amount of federal debt the government can accrue. The limit applies to almost all federal debt including the approximate $24.3 trillion of debt held by the public and the roughly $6.9 trillion the government owes itself as a result of borrowing from various government accounts, like the Social Security and Medicare trust funds.
Debt continues to rise due to both annual budget deficits financed by borrowing from the public and from trust fund surpluses which are invested in Treasury bills with the promise to be repaid later with interest.
The federal debt ceiling was raised in December 2021 and was expected to last until at least January 2023. On January 13, Secretary of the Treasury Janet Yellin wrote to Congress to inform them that the debt limit would be reached on January 19 and the Treasury will begin to use “extraordinary measures” to avoid defaulting on the government’s obligations. Her letter stated that 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. Congress has expressly provided Treasury with authority to take these actions, and prior Treasury Secretaries have used these measures, which will reduce the amount of outstanding debt subject to the limit and temporarily provide additional capacity for Treasury to continue financing the operations of the federal government. After the debt limit impasse has ended, the CSRDF, Postal Fund, and G Fund will be made whole. In her letter, Yellin predicted that the extraordinary measures will keep the government afloat at least until early June.
As a reaction to the secretary’s letter, some in Congress have suggested prioritizing payments so that bond holders would continue to be paid while Congress negotiates. This controversial suggestion has been rejected by the White House and others in Congress.
What happens if the debt ceiling is hit?
Once the government has hit the debt ceiling and exhausts all available extraordinary measures, it can no longer issue debt and soon will run out of cash-on-hand. At that point, incoming receipts would be insufficient to pay millions of daily obligations as they come due.
Without raising the debt ceiling, payments to government contractors, including hospitals that accept patients who use Medicare and Medicaid benefits could be delayed. Social Security checks could not be issued. If the situation dragged on for weeks, it could harm access to health care.
When a standoff occurred in 2011, the Government Accountability Office (GAO) estimated that that the standoff raised borrowing costs by a total of $1.3 billion in FY 2011 and the 2013 debt limit impasse led to additional costs over a one-year period of between $38 million and more than $70 million.
If interest rates for Treasuries increase substantially, interest rates cross the economy would follow. Credit could also be tightened as institutions with large holdings of Treasuries see them decline in value.
Why doesn’t Congress just raise the debt ceiling?
In the past it was not uncommon for the Congress to raise the debt ceiling in a “clean” bill, meaning that no other provisions were added to the bill other than the raising of the ceiling.
However, over the past decade the issue has become more contentious. The new Republican Congress wants to use the debt ceiling as a means to negotiate reductions in government spending. Some in the House have demanded any increase in the debt limit be met with deep spending cuts. Others hope to use the issue as a bargaining chip to enact other conservative policies. House Speaker Kevin McCarthy told President Biden that the Republicans are interested in imposing a spending cap in exchange for temporarily raising the debt ceiling. The White House has rejected negotiating.
What happens next?
If a protracted impasse is projected, even the lead up could dampen the economy. The House, Senate and the White House will have to come together to devise a plan to raise the debt ceiling whether or not spending cuts or some other plan to reduce the debt is added.