Washington is headed for another major battle to
raise or suspend
the nation's debt limit, which restricts the amount of money the federal government can borrow to pay its obligations.
This year, it promises the toughest fight in at least a decade.
US Treasury Secretary Janet Yellen testifies during a House of Representatives hearing.
Saul Loeb/Pool via REUTERS/File Photo
Republicans are demanding that the debt limit increase be accompanied by spending cuts and other savings.
President
Joe Biden
has said he will oppose any attempt to link government spending cuts to raising the debt ceiling, raising the likelihood of a
protracted showdown
.
The president will meet with Republican and Democratic leaders at the White House on May 9 to discuss the way forward.
But it's not yet clear how quickly lawmakers will move to raise the nation's debt limit.
Here's what to know about the debt limit and what will happen if you don't reach an agreement:
What is the debt limit?
The debt limit is a cap on the total amount of money the United States is allowed to borrow to finance the government and meet its financial obligations.
Because the United States runs budget deficits—meaning it spends more than it takes in through taxes and other revenue—it has to borrow
huge amounts to pay its financial obligations
.
These include the financing of social protection programs, interest on the public debt and the salaries of the country's armed forces.
The debt ceiling debate often prompts lawmakers to make calls to cut government spending, but raising the debt limit does not authorize any additional spending and, in fact, only allows the United States to spend money on programs that have already been approved. authorized by Congress.
When was the borrowing limit reached?
The United States officially reached its debt limit on January 19, prompting the Treasury Department to use
accounting maneuvers
known as extraordinary measures to keep paying government obligations and avoid debt default.
These measures temporarily halt certain government investments so the nation can continue paying off its accounts.
The ability to use those measures to delay a debt default could end in June.
Treasury Secretary
Janet Yellen
warned lawmakers Monday that the United States could run out of cash by June 1 if the borrowing limit is not raised or suspended.
How much is the debt of the United States?
The national debt exceeded
$31 trillion
for the first time last year.
The debt ceiling is 31.381 trillion dollars.
Why does the United States have a borrowing limit?
Under the terms of the Constitution, Congress must authorize all of the nation's borrowing.
The debt limit was instituted in the early 20th century so that the Treasury would not have to ask for permission every time it needed to
issue bonds
to pay off accounts.
During World War I, Congress passed the Second Liberty Loan Act of 1917 to give the Treasury greater flexibility in issuing debt and managing federal finances.
The debt limit began to take its current form in 1939, when Congress consolidated different limits that had been placed on different types of bonds into a single debt limit.
Back then, the limit was
$45 billion
.
Although the debt limit was created to make the government run more smoothly, many lawmakers believe it has become more of a problem than it solves.
In 2021,
Yellen stated that she was in favor of
abolishing
the debt limit.
What happens if the debt limit is not raised or suspended?
If the government exhausted all its extraordinary measures and ran out of cash, it would not be able to issue new debt instruments.
That means you wouldn't have enough money to pay off your bills, including interest and other payments you owe to bondholders, the military, and retirees.
No one knows exactly what would happen if the United States got to this point, but the government could end up defaulting on its debt if it fails to make the required payments to bondholders.
Some economists and Wall Street analysts warn that this scenario would be
economically
devastating and could plunge the entire world into a financial crisis.
Will military salaries, social security benefits and bondholders be paid?
Various ideas have been put forth to
ensure
that critical payments are not missed, especially to investors holding US debt bonds.
But neither of these ideas has been tested, and it is not known whether the government will actually be able to keep paying its obligations if it cannot take on more loans.
One idea that has been put forward is for the Treasury Department to prioritize certain payments to avoid defaulting on US debt.
In that case, the Treasury would pay bondholders holding US Treasury debt first, even if it delayed other financial obligations such as government salaries or retirement benefits.
So far, the Treasury appears to have ruled out that option.
Yellen has said that such an approach would not prevent a debt "default" in the eyes of the markets.
“All Treasury systems have been built to pay all of our bills when they are due and on time and not to prioritize one form of spending over another,” Yellen told reporters a few months ago.
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