What Happens If a Debt Ceiling Agreement Isn't Reached
US President Joe Biden speaks during an event at SUNY Westchester Community College in Valhalla, New York, US, on May 10, 2023. Credit - Victor Blue—Bloomberg/ Getty Images
A politically-divided Congress is at a crossroads over raising the U.S. government’s debt ceiling, as the country is on the brink of defaulting on their loans if an agreement isn’t made soon.
The federal debt ceiling was last increased in December 2021, by $2.5 trillion to $31.4 trillion, which the government maxed out in mid-January. The Treasury Department said it has since taken “extraordinary measures” to avoid falling into default on their debt, though Treasury Secretary Janet Yellen warned that the government could run out of money for its bills as early as June 1.
“Given the current projections, it is imperative that Congress act as soon as possible to increase or suspend the debt limit in a way that provides longer-term certainty that the government will continue to make its payments,” Yellen wrote in a letter to House Speaker Kevin McCarthy on May 1.
Lawmakers have made changes to the debt limit more than 100 times since World War II. This year Republicans have vowed to increase the debt ceiling so long as it’s suggested spending cuts are enacted. President Joe Biden, however, wants to see an increase in the debt ceiling separate from any budgetary changes.
Defaulting would “produce an economic and financial catastrophe,” Yellen said in a statement, remarking that the government would not be able to make Social Security payments or invest in future projects. “Congress must vote to raise or suspend the debt limit. It should do so without conditions. And it should not wait until the last minute.”
What are Republicans negotiating for?
On Wednesday, House Republicans passed a spending bill that would increase the debt ceiling but cap federal spending for a decade. The bill, which narrowly passed the House, would also roll back the Biden administration’s energy tax credit, as well as impose certain work requirements on federal social programs, among other measures.
The bill is not likely to move forward in the Democrat-controlled Senate, where many legislators are unhappy with the suggested concessions. President Biden also said he would veto the bill if it reached his desk.
Republicans, however, see it as a step towards negotiations. “We lifted the debt limit; we’ve sent it to the Senate; we’ve done our job,” said House Speaker McCarthy after the bill passed.
What happens if Congress doesn’t reach an agreement?
If no Congressional action is taken and the government reaches its debt ceiling, it will have to default on its financial obligations, although this has yet to happen in history.. This has The government won’t be able to pay salaries for federal employees, veterans’ benefits, and also won’t be able to fund Social Security, affecting some 66 million Americans, though the future of social security is already under question as projections foresee that the fund’s reserves will run out by 2033.
Social Security recipients could temporarily see their checks arrive with a delay, depending on how long it takes politicians to negotiate the debt ceiling.
A default would also seriously impact the global economy, which relies on the relative stability of the United States. The Committee for a Responsible Federal Budget projects that interest rates would increase and investment into Treasury securities would stop, impacting people’s car loans, credit cards, and more.
Previous debt ceiling negotiations were also stalled under the Obama administration, marking a new standard of polarized political battles when it came to discussing the government’s spending budget. In 2011, House Republicans fought for months to decrease the deficit in exchange for a debt ceiling raise, impacting the country’s credit ranking for the first time ever. Discussions culminated two days before the Treasury said the United States would have exhausted all funds. That delay in voting to raise the debt ceiling affected the stock market and led to higher borrowing rates for the U.S. that cost the country an additional $1.3 billion in 2011, according to the United States Government Accountability Office.
President Biden and top congressional lawmakers are set to meet early next week after talks were canceled Friday. “We’ve not reached the crunch point yet but there’s real discussion about some changes we all could make,” Biden said on Saturday before boarding Air Force One. “But we’re not there yet.”
Correction, May 15
The original version of this story misstated how much the debt ceiling last increased. It increased by $2.5 trillion, not from $2.5 trillion.