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• The U.S. government is approaching the legal limit on its borrowing capacity.
• If the debt ceiling isn’t suspended or raised in the next week or two, the United States will struggle to pay bills and meet obligations to bondholders, which could damage the nation’s financial stability.
• Democrats would like to suspend the debt ceiling until December 2022. But Republican leaders have said they will not cooperate, and Democrats haven’t reached agreement on how to proceed.
For President Joe Biden and congressional leaders, time is running out to increase the nation’s debt ceiling.
Put simply, if the debt ceiling isn’t suspended or raised in the next week or two, the United States won’t be able to cover its bills — not just checks to American seniors, veterans and federal employees but also payments to bondholders, a development that could ripple through the U.S. economy and the global financial markets.
Lawmakers have long dreaded votes to raise the debt ceiling because of the political cost: It looks like they’re abetting profligate government spending in a way that an opponent can turn against them in an attack ad.
But the current situation has some added twists.
Specifically, the annual appropriations laws that authorize "discretionary" spending — funding for everything from the military to the Centers for Disease Control and Prevention — are set to run out at the end of September, which is roughly the same time as the debt ceiling is poised to be breached. If this spending authority runs out, then the government would transition into "shutdown" mode, with only certain essential federal employees allowed to work.
It’s not unprecedented for these dual threats to hit at the same time, but it does make finding a solution more complex.
And there’s more: Democratic leaders in both houses of Congress are struggling to pass two other high-profile measures, a bipartisan infrastructure bill and a larger spending measure known as a "reconciliation" bill that would collectively fund trillions of dollars of new and expanded federal programs.
Democratic leaders and Biden want to pass these bills, but haven’t been able to square competing demands from the centrist and progressive wings of their party.
Then there’s pushback from Republicans. In the House, Democrats passed a bill to suspend the debt ceiling until 2022. In the Senate, Republican Leader Mitch McConnell of Kentucky has made clear that Republicans won’t be helping Democrats pass a debt limit increase. This would effectively paint Democrats as the big spenders, even though big GOP-backed laws — including the 2017 tax law and the bipartisan coronavirus relief measures signed by then-President Donald Trump — have helped push the debt toward the limit.
The perennial fights over the debt limit usually come down to partisan politics and posturing. But a failure to agree on a higher limit would have big economic implications for ordinary Americans, the U.S. economy and the rest of the world. Here’s an updated look at the issue and the maneuvering around it.
Every year, the federal government either runs a surplus or a deficit in its accounts. When there’s a surplus, it means that more money came in that year than was spent. When there’s a deficit, it means that more money was spent than came in. In that case, to make up the difference, the government has to borrow money.
The government debt is the cumulative total that the government has borrowed to cover all those deficits and hasn’t yet paid back.
The debt ceiling approximates the credit limit on a credit card. It’s a dollar figure that constrains how much debt the federal government can carry at a given time in order to pay for its operations, and it’s currently set at $28.4 trillion. It’s a legal limit, not a financial one, so it’s not necessarily a reflection of how much debt the government can afford to carry based on the strength of its economy.
The debt limit is not a new mechanism. In the 19th century, Congress approved every individual sale of bonds to the public. But beginning in 1917, Congress started to distance itself from the nuts and bolts of issuing debt, letting the Treasury Department decide when and how to auction bonds, but retaining the right to set an overall debt limit. Whenever the amount of debt approached this limit, Congress would need to vote to raise it, even if the added debt was to finance spending that Congress had already approved.
That brings us to the current situation. A two-year suspension of the debt limit expired Aug. 1, and the federal debt is once again approaching its legal limit. That means if Congress fails to raise or suspend it, the nation won’t be able to legally borrow more money to finance the commitments Congress and the president have agreed to.
Until the limit is hit, the Treasury could use "extraordinary measures" — essentially, shifting around accounts in order to keep cash available for payments — but that wiggle room is expected to be gone by late September. Thus the urgency in Congress to increase the limit.
Some Republicans are blaming Democrats for busting through the debt limit with plans to spend trillions on both the bipartisan infrastructure bill and the larger (but so far unwritten) reconciliation bill. But the GOP argument is misleading.
The U.S. would have needed to raise the debt ceiling even if the Democrats had never pursued those bills, or if Democrats fail to enact them. That’s because existing spending promises — including Social Security and Medicare — are already pushing our borrowing needs past the ceiling.
The debt has expanded significantly in the last few years, due to a combination of the GOP-backed tax cuts enacted in 2017, a series of regular spending bills passed with bipartisan support, and several large relief bills designed to ease the impact of the coronavirus pandemic and the resulting economic fallout.
What happens if the ceiling isn’t raised? "Some law will be broken. Either the debt ceiling will be breached or other legal obligations will not be honored," said Tara Sinclair, a George Washington University economist.
It could be you. If you hold a savings bond your grandmother gave you on your 10th birthday, or if you go to www.treasurydirect.gov to purchase Treasury securities like a bond, bill or note, then you’ve lent money to the government, with the promise of being paid back, with interest, at a specified future date.
If you’re invested in a mutual fund that buys a Treasury bill, you indirectly own that security, and a piece of government debt. Investment banks, foreign governments and other large investors purchase Treasury debt all the time in auctions held by the Treasury, meaning they are owed money by the U.S. government.
About two-thirds of U.S. debt is held in the United States, either directly by individual bondholders or by institutions, such as mutual funds or retirement plans. The remaining one-third is held by foreigners, either individually or institutionally. Of the portion held by foreigners, about 17% is held by Japanese individuals or institutions, and 14% is held by people or institutions in China. Investors in dozens of other countries hold some U.S. debt, too, but no single country other than China and Japan holds more than 7.2% of the foreign total.
Having a large debt load isn’t necessarily a sign of financial distress, as long as the government is able to pay back bondholders on time with interest.
One key reason people choose to buy U.S. government debt: It’s considered one of the safest investments on the planet. Given the size, strength and stability of the U.S. economy, and its enormous borrowing capacity, you can count on getting your money back. If the government needs money to pay back a bondholder, it can usually borrow more.
Once the debt ceiling is reached, the federal government can’t borrow any more money. At that point, the government would have a little breathing room to send out payments. It could use the cash it already had on hand, plus any new revenue it received in the interim. But that cash supply would eventually run out, too.
The most obvious response would be to prioritize payments. Bondholders would be paid off first, since a missed or delayed payment on a Treasury security would entail the most severe peril for the government: default.
Outraging senior citizens by delaying or missing a Social Security check would be bad enough, the thinking goes, but if the Treasury defaults on a debt to its bondholders, investors would potentially have no reason to trust the U.S. as a borrower and might abandon U.S. bonds in the future. That would put the entire stability of the federal government’s finances, and ultimately the U.S. economy, at risk.
But prioritization has problems, too. The Treasury says it’s not clear it would have the legal authority to make those sorts of decisions about who gets paid first. And it could cost more, since the law requires the government to pay interest on any payments that are delayed.
The nonpartisan Congressional Research Service has acknowledged that there’s no clear answer to what constitutes default, but it does note that Black’s Law Dictionary defines the term "default" more broadly as "the failure to make a payment when due." Ultimately, CRS notes, "financial markets’ perceptions of what constitutes a default, or a real threat of default, may be more relevant when assessing the potential impacts of not raising the debt limit."
If enough investors quit buying Treasury securities, the United States would have to offer higher interest rates to lure their money back, raising the government’s borrowing costs in ways that would sooner or later filter throughout the economy.
"This isn’t a prediction by partisan politicians, but by many cold-blooded financial market analysts," Buchanan said.
Interest rates on Treasury bonds set the benchmark for many other types of debts in the private sector. If the Treasury has to hike rates to attract investors, rates would also rise for mortgages, car loans, student loans and credit cards. As businesses find it more expensive to borrow, they would stop hiring and start laying people off; house prices would fall and retail sales would drop. The newly unemployed would have less money to spend, reinforcing the negative spiral. Taxes may have to rise at some point to cover the government’s higher borrowing costs.
More directly, anyone who owns any stocks or bonds — even if the bonds are not from the U.S. government — will see the value of those investments drop. This includes the values of mutual funds, pensions and retirement savings accounts.
And because U.S. Treasury securities quietly underpin much of the nation’s (and the world’s) economic and financial systems, anything that disrupts confidence in Treasurys would likely throw the banking sector into turmoil. This could reverberate throughout the world. "Many economists and financial institutions," the Congressional Research Service has said, "have stated that if the market associated Treasury securities with default risks, the effects on global capital markets could be significant."
Democrats would like to suspend the debt ceiling until December 2022. But without a signal by McConnell to other Republicans that they should back a debt-limit increase, Democrats would have to go it alone, presumably through the reconciliation process, which would enable Democrats to pass a measure without Republican votes.
But even that would require broad general agreement among Democrats on other elements of the spending packages, and that has yet to happen. (The reconciliation process can only be used once per fiscal year, so if it’s used for the policy initiatives that Biden and Democrats are seeking, they couldn’t write a separate reconciliation bill that lifts the debt ceiling until the following fiscal year, when it would be too late.)
On Sept. 21, the House passed a bill that included a temporary spending extension to stave off a government shutdown, along with a new pause on the debt ceiling through December 2022. But the vote was along party lines, and in the Senate, where 60 votes are needed to proceed to routine votes, such a bill would be dead on arrival.
Marc Goldwein, senior vice president for the Committee for a Responsible Federal Budget, said that "whenever it gets close, I get scared," he said. "So I’m nervous."
Still, Goldwein maintains a cautious optimism. "It’s not unusual to be in a standoff until there’s a breakthrough," he said. "It’s pretty common to feel that you don’t know how they’re going to manage to raise, and then there’s a deal and it’s done."
PolitiFact, "So what is the debt ceiling all about anyway?" Sept. 7, 2017
Bloomberg, "Why the U.S. Is Having Yet Another Debt Ceiling Debate," Sept. 13, 2021
Washington Post, "Democrats unveil new plan to fund government, suspend debt ceiling as major showdown with GOP looms," Sept. 20, 2021
Washington Post, "House passes bill to avert shutdown and suspend debt ceiling, but legislation faces grim prospects in Senate," Sept. 21, 2021
Committee for a Responsible Federal Budget, "Q&A: Everything You Should Know About the Debt Ceiling," July 28, 2021
Email interview with Tara Sinclair, economist at George Washington University, Sept. 20, 2021
Interview with Marc Goldwein, senior vice president for the Committee for a Responsible Federal Budget, Sept. 20, 2021
Email interview with Neil H. Buchanan, economist and law professor at the University of Florida and author of The Debt Ceiling Disasters, Sept. 21, 2021