Republicans in the White House and Congress are caught in a showdown over the debt ceiling. If not extended or suspended, it could result in the first US default. Treasury Secretary Janet Yellen has warned that the US could run out of money to pay its obligations by June 1 if Congress does not address the issue.
Since neither side is likely to budge, here’s what you need to know about the position.
This is the maximum amount of money Congress allows the federal government to borrow to cover its bills. Because the government usually spends more money than it collects in taxes, it has to go into debt to pay for its expenses. However, unlike credit cards, the spending has already been approved by Congress, so the debt limit doesn’t apply to new spending.
This facility was created during World War I in an effort to make lending easier. Prior to 1917, Congress was required to pass additional debt for each new spending measure it passed. Until recently, this has been a fairly routine process. Congress has raised the debt ceiling 78 times since 1960. The debt ceiling was last raised by $2.5 trillion in December 2021, taking the limit to $31.381 trillion.
If Congress does not agree to raise the debt ceiling, the government will not have the money to pay its bills and will default on its debt. The Treasury Department has already begun taking extraordinary steps to keep funding the government, but Yellen said she expects the money to run out completely by early June.
What happens if the United States defaults?
A sovereign debt default would wreak havoc on the economy and shake up markets around the world. Defaulting on Treasuries could put the US economy in jeopardy. The last time Republicans in Congress threatened default was in 2011, Standard & Poor’s downgraded the US credit rating from AAA to AA+ for the first time.
Moody’s Analytics recently estimated that if the US defaults, GDP would decline by 4% and more than 7 million workers would lose their jobs. According to statistics, even a brief lapse will result in loss of 20 lakh jobs.
In that scenario, US bond ratings would be classified as “prohibited default” according to Fitch Ratings, and Treasuries would be down-rated until the US could borrow again. The Brookings Institution notes that a default could lead to $750 billion in higher federal borrowing costs over the next decade.
What’s more, a default would shake America’s standing on the world stage. US Director of National Intelligence Avril Haines told the Senate Intelligence Committee last week that Russia and China would take advantage of the possibility of the US defaulting on its debt. Haines warned that both nations would “try to uncover the chaos within the United States of America, that we are not capable of functioning as a democracy.”
What about government programs?
If the US defaults, it would mean a freeze in payments of tens of billions of dollars. The Bipartisan Policy Center estimates that $50 billion in Social Security benefits, $20 billion in Medicaid provider payments, $12 billion in veterans’ benefits, $6 billion in federal wages, and $1 billion in benefits will be distributed in the first half of June. Million Benefits in SNAP.
In an interview with CNBC on Monday, Yellen deferred being asked how the payments would be prioritized.
Yellen said, “There is no good choice, every choice is a bad choice.” “I really don’t want to get into the discussion and their ranking because, as all Treasury Secretaries know, the only option that really leaves our economy and our financial system in good shape is to raise the debt ceiling and make it clear that That Congress endorses is the basic principle that the United States pays its bills.
Republicans are concerned about the rising national debt, which has grown from less than $1 trillion in the 1980s to more than $30 trillion today. They refuse to raise the debt limit unless spending is cut.
House Republicans last month passed the Limit, Save and Grow Act, which they want to cut. The bill would make sweeping cuts to federal discretionary spending, impose new work requirements for welfare recipients and expand mining and fossil fuel production, all in exchange for raising the debt ceiling for about a year.
The White House has been adamant that it is Congress’ responsibility to raise the debt ceiling without conditions, as it did three times under the Trump administration. President Joe Biden has repeatedly called on House Republicans to pass a clear increase in the debt ceiling and hold a separate conversation about spending cuts in the budget.
The President has urged MPs to engage in “normal reasoning” rather than ultimatums.
“As I’ve always said, we can debate where to cut, how much to spend, ultimately how to reform the tax system so that everyone gets to pay their fair share or the path they’re on, continue, but not in danger of default.” Biden said on Friday. “Let’s put away the threat of default. Let’s have a normal argument. That’s why we have a budget process to discuss openly for all to see.”
Leaders of both parties will have to continue discussions to reach an agreement before the June 1 deadline. If they don’t, the Treasury will have to start deciding which bills to prioritize before it runs out of money entirely, which Yellen called unsustainable.