What is the US Debt Ceiling?
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– The US debt ceiling is a legislatively steadfast limit on the total amount of money the United States government is authorized too borrow to meet its existing legal obligations.
– This limit applies to most of the federal government’s borrowing, including debt issued by the Treasury to finance government programs and pay obligations like Social security and Medicare benefits, military salaries, and interest on the national debt. The debt ceiling does *not* authorize new spending; it allows the government to pay for spending Congress has *already* approved. Treasury Department FAQ on the Debt Ceiling provides a detailed clarification.
– The concept originated in 1917 with the Second Liberty Bond Act, initially as a way to finance world War I. GAO Report: Debt Ceiling: Historical Overview and Potential Impacts of Not Raising It details the historical evolution of the debt ceiling.
- As of November 2023, the debt ceiling was set at approximately $31.4 trillion. Fiscal Obligation Act of 2023 (signed into law June 3, 2023) suspended the debt ceiling until January 1, 2025.
What happens if the US reaches the Debt Ceiling?
– If the US reaches its debt ceiling without congress raising or suspending it, the government risks defaulting on its obligations.
– A default would mean the Treasury Department would be unable to pay all of its bills on time, potentially including payments to Social Security recipients, Medicare providers, military personnel, and holders of US Treasury securities. White House Statement on the bipartisan Budget Agreement highlights the potential consequences avoided by the recent agreement.
– While the Treasury can employ “remarkable measures” – such as suspending investments in certain government employee retirement funds – to temporarily delay a default, these measures are finite and eventually exhausted. Treasury Secretary Yellen’s Letter to Congressional Leaders (May 1, 2023) details the use of extraordinary measures and their limitations.
– The Congressional Budget Office (CBO) estimates that the Treasury exhausted its extraordinary measures on January 19,2023,leading to a period of heightened default risk. CBO Report: Options for Addressing the Debt Limit provides analysis of the situation in early 2023.
What are the potential consequences of a US default?
– A US default could have severe and far-reaching consequences for the US and global economies.
– These consequences include increased borrowing costs for the US government and businesses, a potential recession, a decline in the value of the US dollar, and damage to the United States’ reputation as a reliable borrower.Federal Reserve chair Jerome Powell’s Testimony before the House Financial Services committee (March 21, 2023) outlines the potential economic impacts.
– The 2011 debt ceiling crisis, while ultimately resolved, led to a downgrade of the US credit rating by Standard & poor’s, the first time in US history. Standard & poor’s Downgrade of US Credit Rating (August 5, 2011) details the downgrade and its rationale.
– A prolonged default could trigger a global financial crisis, as US Treasury securities are widely held by foreign governments and investors. The Brookings Institution estimates that a default could wipe out $15 trillion in household wealth. Brookings institution Analysis: What Would a U.S. Default Really Look Like? provides a detailed assessment of potential wealth losses.
What is the current status of the debt ceiling?
- The debt ceiling was suspended on June 3, 2023, through the enactment of the Fiscal Responsibility Act of 2023.
- This suspension is set to expire on January 1,2025,at which point the debt ceiling will be reinstated at a new level.GovTrack.us: HR3746 - Fiscal Responsibility Act of 2023 provides legislative details and tracking.
– The CBO projects that the national debt will reach $46.3 trillion by the end of 2033. CBO Long-Term budget Outlook (February 2024) provides projections for the national debt and deficit.
– Discussions regarding the next debt ceiling increase are expected to begin in late 2024 or early 2025.
