10 questions answered on the debt limit

As Congress battles over how to keep the nation from defaulting on its debt ahead of a looming deadline, Americans are getting a primer on the country’s borrowing limit. 

This week, the Treasury Department warned it could run out of “extraordinary measures” to stave off a federal default as soon as June 1. If the U.S. runs out of cash to pay its bills, experts fear the global economy and financial system could face a catastrophe.

Here’s ten questions and answers about the debt limit, what’s at stake and what Washington is doing about it.

What is the debt ceiling?

The debt limit — also referred to as the debt ceiling or the country’s borrowing limit — is a cap on how much money the Treasury can owe to cover the country’s bills.

Raising or suspending the debt limit doesn’t authorize new spending. Doing so simply allows the government to keep borrowing money to pay expenses that were already approved by Congress and the White House.

How high is the debt ceiling?

The debt ceiling was last raised to roughly $31.4 trillion in late 2021 after a tumultuous showdown between the White House and Senate Republicans.

The national debt hit that threshold in January, prompting the Treasury to take emergency measures to buy time for congressional action. Those measures involve suspending investments of certain funds that count against the debt limit, the department explained at the time. 

House Republicans introduced a bill — the Limit, Save, Grow Act of 2023 — last month that would raise the debt limit by $1.5 trillion or through March 2024, whichever occurs first. But they attache a host of partisan spending proposals to the plan that most Democrats will not support.

What happens if the U.S. defaults on its debt?

Experts and lawmakers have warned of disastrous effects to the economy if the federal government defaults.

While experts expect the nation could see a recession sometime later this year, they warn a federal default would likely speed up that timeline, raising the threat of a drastic slowdown.

“It would affect lending and borrowing and financial markets,” New York University economics professor Mark Gertler told The Hill, adding that the combination of less borrowing and less spending would trigger recession.

The nation would also likely see higher interest rates on its debt in the event of a default, as the U.S. would be seen as a less trustworthy borrower. Higher borrowing would not slow the economy and make it difficult for the U.S. to power through a potential recession

U.S. Treasury bonds are currently regarded as among the world’s safest assets, affording the government a reputation as a reliable borrower on the global stage. That standing allows the government to borrow more money to fulfill its financial obligations.

Why does the U.S. have a debt ceiling?

The debt ceiling was created through the Second Liberty Bond Act of 1917, which gave the Treasury Department the authority to issue bonds and borrow money to fund spending approved by Congress and the president, according to a 2015 report from the CRS.

Before the Second Liberty Bond Act, the Treasury Department could only borrow money and issue bonds according to specific instructions from Congress. As the size of the U.S. economy and federal budget exploded during World War I, lawmakers were unable to keep up with the volume and complexity of federal spending.

To keep the the nation’s finances in check, the Second Liberty Bond Act imposed a cap on how much debt the Treasury could take on to fund spending, thus creating the debt limit.

In subsequent years, changes were made to allow the Treasury “more flexibility in debt management and to allow modernization of federal financing,” CRS noted.

How many times has the debt ceiling been raised?

Lawmakers have acted to “permanently raise, temporarily extend, or revise the definition of the debt limit” on 78 different occasions in the past 63 years, the Treasury Department says on its website.

Forty-nine of those instances occurred under Republican administrations, and 29 happened under Democratic administrations.

Has the U.S. ever defaulted on its debt?

A deliberate default by Congress would be unprecedented in recent history, experts say. 

There is debate around whether the nation technically experienced a brief default in 1979, after the federal government missed some payments to investors. The incident was chalked up to technical issues at the time, but not without some added costs, research in the years that followed showed.

“Because of severe technical difficulties, the U.S. government was unable to repay investors in Treasury bills (T-bills) in late April through early May, 1979. This incident led to a 60 basis point increase in T-bill rates at the initial occurrence of the default,” finance professors Terry L. Zivney and Richard D. Marcus wrote in their 1989 piece, “The Day the United States Defaulted on Treasury Bills.” 

“The default apparently warned investors that Treasury issues were not completely riskless,” they also wrote.

What happens to Social Security payments and other benefits if the US defaults?

Experts warn anyone relying on a check from the government could be a bind if the nation defaults.

In a recent piece, Brookings Institution senior fellows Wendy Edelberg and Louise Sheiner said Social Security beneficiaries, agencies and contractors could see their payments delayed if the U.S. runs out of cash.

While federal agencies would still possess “legal authority, provided by Congress, to obligate funds,” they warn federal workers could also have to worry about delayed paychecks.

The Treasury would still be obligated to pay federal workers if they U.S. defaults, but experts say they may be unable to do so until the debt limit is raised.

What happens to my investments if the U.S. defaults?

A federal default would likely cause a meltdown in financial markets as trillions of dollars in U.S. Treasury bonds — a linchpin of the global financial system — plummet in value.

Edelberg told The Hill in an interview that the stock market could go into a free-fall if the U.S. defaults., with firms “laying off workers en masse because now they are worried about what the economy is going to look like over the next few years.”

“Even the brinkmanship we saw in 2011 imposed costs on the economy. During that crisis, consumer confidence and the stock market plummeted. It also harmed the international reputation of the US,” said John Buhl, a researcher at the Urban Institute, said.

“A repeat of that, let alone an actual default, would make the Fed’s attempt at a ‘soft landing’ a lot more difficult,” Buhl said.

What is Washington doing to address the debt limit?  

Republicans are lining up behind the House GOP bill, which they have called a good starting place in bipartisan debt limit talks. But Democrats, who oppose tying any spending cuts to raising the debt limit, have come out in strong opposition against the plan. 

House Republicans have proposed capping government spending at fiscal 2022 levels and limiting spending growth to 1 percent every year for the next decade. 

Other proposals featured in the bill would impose tougher work requirements for programs like Medicaid and the Supplemental Nutrition Assistance Program, put an end to popular student loan actions implemented under the Biden administration, and target parts of a signature economic bill passed by Democrats last year without GOP support.

Democrats have instead pushed for raising the debt limit in a “clean” bill without conditions after Republicans approved three debt limit increases under former President Trump without reducing the debt.

But Republicans have drawn red lines against raising the limit without fiscal reforms. 

Members expect more information about next steps following Biden’s scheduled meeting with Speaker Kevin McCarthy (R-Calif.) and other congressional leaders on May 9. 

How much higher will the debt limit rise?

The national debt subject to the borrowing limit is on track to potentially reach $52 trillion in 2033, according to a February report from Congressional Budget Office.

The CBO also projected the federal budget deficit would reach $1.4 trillion in fiscal 2023 and warned that future annual deficits would average $2 trillion over roughly the next decade.

Republicans and Democrats have offered ideas on how to address the nation’s deficits, but both sides have been far apart in their approaches. 

Republicans have pushed for defense spending increases with sharp reductions in nondefense spending to tackle future deficits. Democrats have instead pressed for tax hikes on the wealthy to bring in more revenue to go toward deficit reduction and help cover boosts to nondefense spending.