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On April 26, the Republican-led House passed a bill that would extend the fast-approaching limit on how much debt the federal government can carry, along with other Republican priorities.
Although the narrowly divided chamber passed the bill, the inclusion of Republican-friendly provisions means it has no chance of winning approval in the Democratic-controlled Senate, or of being signed into law by President Joe Biden.
It represents another marker along the uncertain road to extending the debt limit. If the process fails, it could prompt an unprecedented national default with potentially devastating impacts on the economy.
The House bill’s passage provides us a good opportunity to recap what the debt limit is, why it’s important, and what’s next for lawmakers and the president.
Every year, the federal government runs either a surplus or a deficit in its accounts. A surplus means more money came in that year than was spent. A deficit means more money was spent than came in. When there’s a deficit, the government must borrow money to make up the difference.
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 limit, sometimes called 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 to pay for its operations. The limit is legal, not financial, so it doesn’t necessarily reflect how much debt the government can afford to carry based on the economy’s strength.
If the limit isn’t raised or suspended, the United States cannot cover its bills — not just checks to older Americans, veterans and federal employees but also payments to bondholders, a development that could ripple through the U.S. economy and the global financial markets.
Now, as in previous situations in which the debt was approaching the statutory limit, the government can move money around, perhaps shifting funds between Cabinet departments, as bills come due. This can postpone a potential default and buy time for negotiations to continue.
How much time? No one knows for sure, but likely a few months.
The "X date," as budget wonks call the debt-default deadline day, could hit in early June at the earliest, Treasury Secretary Janet Yellen has said. Other recent estimates from private-sector economists range from June to mid-August.
One variable for the timing will be how strong tax revenue is this year. So far, tax payments are running lower than the previous year, which could push the X date earlier.
Existing spending promises — including Social Security and Medicare — have pushed the nation’s borrowing needs closer to the debt limit.
The debt has grown significantly in the last few years for several reasons: the GOP-backed tax cuts enacted in 2017, a series of regular spending bills passed with bipartisan support, large relief bills designed to ease the coronavirus pandemic’s impact, the bipartisan infrastructure bill and the broad domestic spending package known as the Inflation Reduction Act.
When Barack Obama was inaugurated in 2009, the debt was $10.6 trillion. On Donald Trump’s Inauguration Day in 2017, it stood at $19.9 trillion. And when Joe Biden took office in 2021, it was $27.8 trillion. Today, more than two years into Biden’s administration, it’s almost $31.5 trillion.
It could be you. If you hold a savings bond your grandmother gave you on your 10th birthday, or if you visit www.treasurydirect.gov to buy Treasury securities such as a bond, bill or note, you have (or your grandma has) 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 in Treasury-led auctions, 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 foreign bondholders or entities. Of the portion held by foreigners, about 15% is held by people or institutions in Japan, and 12% is held by people or institutions in China.
U.S. government debt is considered one of the safest investments on the planet given the U.S. economy’s size, strength and stability and the government’s enormous borrowing capacity. If the government needs money to pay back a bondholder, it can usually borrow more.
But if delayed payments become a real possibility, investors might be spooked and quit buying Treasury securities. To lure their money back, the U.S. would have to offer higher interest rates, which would raise the government’s borrowing costs in ways that would eventually filter throughout the economy.
Breaching the debt limit could hasten a recession, tank the stock market and upset the global economy.
Interest rates on Treasury bonds set the benchmark for many other types of private sector debt. 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 pricier 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 to cover the government’s higher borrowing costs.
More directly, the value of stocks or bonds — even if the bonds are not from the U.S. government — would drop for anyone who owns them. 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 Treasury notes and bonds would likely roil the U.S. banking sector.
Lawmakers have long dreaded votes to raise the debt limit because of the political cost: It looks as if they’re abetting runaway government spending in a way opponents can leverage in reelection campaign attack ads. But raising the debt limit doesn’t greenlight future spending; it allows existing commitments to be paid off.
The 2023 version of this fight comes in a context of divided government — a Democratic president, a Democratic Senate and a Republican House. And for the Senate to act, its slim Democratic majority needs to secure support from at least nine Republicans (if all Democrats vote in unison, which is not guaranteed). In the House, Speaker Kevin McCarthy, R-Calif., can’t afford to lose more than four of his own members in a vote, as long as all Democrats vote together.
Also, the parties today are as polarized ideologically as they’ve been in a long time, making cross-party cooperation difficult.
The Republicans’ Limit, Save, Grow Act, would lift the debt ceiling by $1.5 trillion or through March 31, 2024, whichever comes first. But it ties this to a number of GOP policies that Democrats oppose.
The bill would reduce discretionary spending — that is, spending that Congress and the president must approve regularly — and excludes items such as Social Security and Medicare that are effectively on autopilot. Under the bill, discretionary spending would return to fiscal year 2022 levels and face a cap on future growth.
The bill would also rescind unspent COVID-19 pandemic relief and funding approved for tax enforcement by the IRS and would end Biden’s proposal to cancel some student debt. It would also impose work requirements for participating in federal programs such as Medicaid and institute policies favorable to fossil fuel extraction.
Although policies in the House bill make it untenable for Democrats to support the entire measure, the bill’s passage still represented a milestone for House Republicans.
First, it showed that the GOP could unify despite its narrow majority in the chamber. The bill passed, 217-215, with just four GOP defections, which is the least the party can muster given the House’s current partisan lineups.
Second, passage gave the GOP something on paper to present to Democrats for starting negotiations.
So far, the White House and Senate Democratic leaders have said that they want a "clean" debt limit that’s not tied to spending cuts. That means they do not see the House bill as a realistic starting point for negotiations.
"I’m happy to meet with McCarthy, but not on whether or not the debt limit gets extended," Biden said at a joint press conference April 26. "That’s not negotiable."
Senate Majority Leader Chuck Schumer, D-N.Y., supported that approach.
"Discussion of spending cuts belongs in talks about the budget, not for bargaining chips on the debt ceiling," Schumer said after the House bill passed. "The speaker should drop the brinkmanship, drop the hostage taking, come to the table with Democrats to pass a clean bill to avoid default."
Meanwhile, Schumer’s Republican counterpart, Minority Leader Mitch McConnell of Kentucky, said the White House and House Republicans need to be the primary shapers of an agreement. "The president and the speaker need to come together and solve the problem," he said after the House vote.
Douglas Holtz-Eakin, president of the center-right American Action Forum, said the White House’s continued position is "unrealistic and unproductive."
"I’ve been worried about (a debt-limit default) and I remain worried, because the consequences would be quite large and negative," he said. "And I will get more worried if the White House appears to continue with an apparent absence of urgency."
The worst scenario, experts agree, would be a U.S. default. Even a brief default could damage the United States’ financial reputation permanently.
There has been discussion of prioritizing payments, such as paying off bondholders first, followed by Social Security recipients. But it’s unclear whether the Treasury has the legal authority to decide this and Yellen, who would have to implement such a plan, has said she dislikes the idea.
Ultimately, there could be a compromise in which each side accepts some things it doesn’t like and absorbs the accompanying political pain.
Steven Dennis, a veteran congressional reporter now with Bloomberg News, occasionally highlights that Congress tends to be at an impasse, until it isn’t. He regularly sends a variation on this tweet as a reminder whenever Congress is consumed with negotiations on some legislative priority:
PolitiFact, "The debt limit fight: Why does it matter? How could it be resolved?" Jan. 19, 2023
PolitiFact, "The looming debt-ceiling showdown: What you need to know," Sept. 22, 2021
PolitiFact, "So what is the debt ceiling all about anyway?" Sept. 7, 2017
PolitiFact, "Hakeem Jeffries said a U.S. debt limit default would be a historical first. He’s mostly right," Jan. 11, 2023
Treasury Department, Debt to the penny, accessed April 27, 2023
Congress.gov, H.R. 2811 - Limit, Save, Grow Act of 2023
Roll call vote on H.R. 2811, April 26, 2023
Treasury Department, "Major foreign holders of Treasury securities," accessed April 27, 2023
New York Times, "House G.O.P. Passes Debt Limit Bill, Paving the Way for a Clash With Biden," April 26, 2023
NBC News, "GOP-led House passes bill to hike debt limit and slash spending," April 26, 2023
CBS News, "The U.S. has hit the debt limit. Now what?"Jan. 22, 2023
CBS News, "When could the U.S. default? Economists say debt ceiling "X date" coming sooner than expected," April 26, 2023
CNN, "Here’s why Janet Yellen doesn’t think prioritizing payments would avoid a debt ceiling debacle," March 22, 2023
Steven Dennis, tweet, Oct. 2, 2020
Interview with Douglas Holtz-Eakin, president of the American Action Forum, April 27, 2023