Breaking Down the Debt Ceiling Deadline
The Treasury Department announced in January that the United States was approaching the current borrowing cap of $31.4 trillion, which prompted it to start putting in place ‘extraordinary measures’ to control the government’s cash flow through the spring.
There are concerns that Congress won’t be able to increase the debt ceiling in time to prevent a potential default on debt payments due to the widening party divide over the issue and federal expenditure. Democrats favour raising the debt ceiling with no restrictions. Republicans want spending reductions in exchange for lifting the cap. On May 9, President Biden intends to meet with legislative leaders.
What is the debt ceiling?
The amount of money the government may borrow is capped by Congress, and when the cap is reached, lawmakers must either raise it or suspend it in order for the Treasury Department to continue issuing debt. The U.S. routinely has huge yearly deficits, therefore the debt ceiling needs to be discussed frequently.
When is the deadline for raising the debt ceiling?
In early May, Treasury Secretary Janet Yellen warned that if Congress doesn’t first lift the debt ceiling, the U.S. government could not be able to pay all of its payments on schedule as early as June 1. The newest forecast from the Treasury, according to Ms. Yellen, is still speculative. According to her, the Treasury may eventually be able to cover the nation’s debts for many weeks after early June.
What would happen if the debt limit isn’t raised?
If the government is unable to borrow money to cover all of its obligations, default would result, forcing it to stop certain pension payments, reduce or withhold military and federal employees’ salaries, or delay interest payments.
The possibility of a government default has alarmed lawmakers from both parties, business organizations, and Wall Street firms. According to them, such an event would be catastrophic for the financial markets and the American economy. A decline in market confidence might lead to a significant selloff in Treasury securities, which could ultimately result in wider financial unrest. Missed payments on other American debts, such as Social Security benefits, could also have a negative financial impact.
Could the Treasury prioritize some payments above others in order to prevent default or lessen the impact on seniors?
Republicans have proposed legislation requiring the Treasury to prioritise specific expenditures over other government commitments, such as payments to creditors and payouts for Social Security recipients. Such a strategy has been derided by Democrats and has been deemed unrealistic by previous Treasury officials. According to minutes of a Fed meeting, the Federal Reserve and the Treasury formalised a plan in August 2011 to make timely payments on Treasury debt and postpone making other payments to the government if a deal on the debt ceiling could not be achieved.
Ms. Yellen has issued a warning, pointing out that Treasury’s processes aren’t set up to give bondholder payments top priority and that skipping any payment would essentially be considered default.She also disregarded the long-floated proposal to avoid Congress by minting a platinum coin worth $1 trillion to prevent default.
Are there any other alternatives available to the White House besides looking into the 14th Amendment?
Issuing debt under the 14th Amendment, which declares that the legitimacy of U.S. debt “shall not be questioned,” is another option that is now under study. People with knowledge of the conversations said that Biden administration officials spent time thinking through the legal implications and probable market responses, despite the fact that administration attorneys are still notably dubious.
Why is there a dispute over the debt ceiling now?
A pact between Senate Democrats and Republicans in 2021 essentially allowed Democrats to increase the debt ceiling with a simple majority vote rather than the 60 votes generally needed to move legislation in the Senate. This ended the most recent debt-ceiling dispute. President Biden signed legislation increasing the debt ceiling by $2.5 trillion to about $31.4 trillion after it had been approved by both chambers.
This time, Republican control of the House and continued Democratic control of the Senate make raising the debt ceiling more difficult.
Does a raised debt ceiling sanction further spending?
No. Although a vote to extend the debt ceiling does not approve any new expenditure, it basically gives the Treasury permission to raise funds to cover previously approved expenses. Congress approves discretionary expenditure, which accounts for about one-third of all government spending, through yearly appropriations bills. The remainder is automatically spent on social security, medicare, and other programmes.
How does a government shutdown relate to the debt ceiling?
Although the names allude to two different challenges, they both have an impact on how well the federal government can operate. A default may result if the government is prevented from issuing fresh debt as a result of reaching the debt ceiling. A partial government shutdown happens when Congress fails to provide fresh funds to cover the cost of keeping the government fully operational. Typically, this results in certain government employees and contractors being placed on temporary furloughs until a new spending bill is approved. The government has kept up with its scheduled payments to debt holders, retirees, and other parties even during shutdowns.