- Natalie Sherman
- From BBC News in New York
The U.S. government has reached its statutory borrowing limit. The Treasury Department is taking steps to avoid a default that could be catastrophic for the U.S. economy.
Hitting the debt ceiling means the government is no longer allowed to borrow money — unless Congress agrees to suspend or change the debt ceiling, which currently stands at nearly $31.4 trillion.
That’s usually what happens.
Since 1960, politicians have raised, extended or revised the debt limit 78 times—including three in the past six months alone.
But as Republicans take control of the House of Representatives and call for spending cuts, there is new tension in Congress. Some believe lawmakers will delay any debt settlement this time around, pushing the U.S. into intentional default for the first time in its history.
What happens in this situation?
What will America do now?
For most people, the effect should be barely noticeable—at least for the first few months.
The US Treasury can manage the situation by taking steps to avoid exceeding the debt ceiling. In the past, this has included holding back investments in health and pension funds for federal employees. Later, these investments end up being compensated for maintaining the balance.
In a January 19 letter, Treasury Secretary Janet Yellen announced a similar “credit suspension period” until June 5 to the Civil Service Retirement and Disability Fund (CSRDF) and the suspension of payments to the Postal Service Retiree Health Benefit Fund (PSRHBF).
“According to the law, the CSRDF and PSRHBF will be supplemented once the credit limit is raised or suspended,” the letter said. Pensioners and central government employees will not be affected by these measures.
But even delays have important consequences.
An impasse on the issue in 2011 led credit agency S&P to downgrade the country’s rating — something unheard of in the United States until then.
Government analysts estimate that the year’s delays will raise the U.S. Treasury’s borrowing costs by at least $1.3 billion as investors demand higher rates because of the uncertainty.
Analysts already expect the debate over the issue to unnerve financial markets this year.
Treasury Secretary Janet Yellen estimated that the special measures could help buy time for the U.S. at least until June, when the government may run out of money to pay its bills.
It’s a scenario analysts see as an economic disaster.
Some believe that authorities should do what they can to avoid default. This means finding ways to pay interest when other obligations, such as defense contractor payments, go unpaid; Social Security checks, salaries of government employees, including retirees and military personnel across the country.
Even something as basic as weather forecasts can suffer because many meteorologists rely on data from the government-funded National Weather Service.
A default could erode the country’s credibility and roil global financial markets, where US debt is widely traded and traditionally seen as low risk.
The dollar will weaken and borrowing costs will rise—first for the government, but eventually for the general public, with higher interest rates on home loans and credit card debt.
Reaching that level would be unprecedented for the United States and would cause widespread damage to consumer confidence and an economy that is already in a precarious position.
“Failure to meet government obligations would cause irreparable damage to the U.S. economy, the livelihoods of all Americans, and global financial stability,” Yellen recently warned.
Why has this become a growing problem?
The credit limit was first introduced in 1917 to give the government flexibility to raise money during World War I. In theory, this gives Congress a way to retain some control over executive spending.
But with greater political polarization, fights over the debt ceiling have become increasingly volatile. US debt soared, nearly doubling in a decade.
This is due to massive government spending during the financial crisis and pandemic – but also a reflection of the fact that the country has run a budget deficit (spending more than it took in) every year since 2001.
The debt ceiling is always a political bargaining chip.
The 2011 row over the debt ceiling was resolved when then-President Barack Obama agreed to more than $900 billion in Republican-demanded spending cuts — and raised the debt ceiling by the same amount.
Some Republicans are now pushing for spending cuts again — but this time Democrats are rejecting the idea.
The U.S. public debt ceiling differs from the spending ceiling adopted in Brazil. In the US case, the law sets limits on how much money the government can borrow. In the Brazilian case, the annual budget is limited.
Approved by Congress in 2017 during the government of Michel Temer, it was the target of criticism from two presidential candidates in the last elections, Luiz Inacio Lula da Silva and Jair Bolsonaro.
In 2022, the Bolsonaro government studied replacing the spending cap with something like the debt ceiling, but the idea was never implemented.
Lula’s new economy minister, Fernando Haddad, has already promised that Brazil will have a “new fiscal framework” by April of this year, but it is unclear what his plan will be.
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