The clock is ticking for Congress to reach an agreement to raise the federal borrowing limit, also known as the debt ceiling, before the government runs out of money to pay its bills sometime within the next month or so.
The ceiling was suspended in 2019 and was automatically reinstated at the beginning of August. Top Republicans have said they will not support Democrats in raising the debt ceiling this year, setting up a Congressional showdown that could roil markets if not resolved soon.
Congress sets a limit on the amount of money the government can borrow, and once that limit is reached, lawmakers must raise or suspend the limit before the Treasury Department can issue new debt.
No, raising the debt limit does not authorize new spending; rather, it allows the Treasury to raise funds to pay for expenses that the government has already authorized. Approximately one-third of federal spending is discretionary, which is approved by Congress through annual appropriations bills. The remainder is spent automatically on programs such as Medicare, Medicaid, and Social Security.
Although Democrats intend to increase revenues to fund their economic agenda over the next decade, their plans would still add to deficits in the first few years as new spending programs ramp up before tax increases fully take effect. Shortfalls in the near term may necessitate a larger debt limit increase than would otherwise be required to cover new spending over the next several years. Rather than a specific number, Democrats have proposed suspending the borrowing limit until December 2022.
If the government is unable to borrow to pay bills as they become due, it will be forced to suspend certain pension payments, withhold or reduce the pay of soldiers and federal employees, or delay interest payments, which would constitute default. According to one Goldman Sachs estimate, unless Congress raises the debt ceiling, the Treasury may be forced to cut payments by more than 40%, including to some US households.
Standard & Poor’s downgraded the United States’ triple-A credit rating for the first time in 2011, after the Treasury was on the verge of being unable to pay certain benefits. In recent weeks, business groups, current and former Treasury officials, and Wall Street firms have raised concerns about the possibility of a government default, which they say would be disastrous for financial markets and the US economy.
These terms refer to two distinct issues, but both have an impact on the federal government’s ability to function. A partial government shutdown occurs when Congress has not appropriated new funds to pay for keeping the government fully open, typically leading to temporary furloughs for some government workers until a new spending bill is passed. Hitting the debt ceiling prevents the government from issuing new debt to pay its bills and could eventually lead to default. During previous shutdowns, the government continued to make regular payments to debt holders, retirees, and others, concentrating the impact primarily on federal workers and contractors.
In July 2019, Congress voted to suspend the debt limit until July 31, 2021, after which it would be reset to include any new borrowing in the intervening years.
On August 1, the limit was raised to around $28.5 trillion, the current level of total US debt, which includes debt held by the public and government agencies. (A separate graphical explanation of the rising debt ceiling can be found here.) Since then, the Treasury has been unable to raise new funds through bond markets.
The Treasury has used emergency measures to save money so that the government can continue to pay its obligations to bondholders, Social Security recipients, veterans, and others. Since August 1, the measures to raise cash have included redeeming certain investments in federal pension programs as well as suspending new investments in those programs.
When those measures expire, the agency may begin to miss payments on the government’s obligations, potentially resulting in a default on US debt.