The legal limit on how much debt the U.S. government can owe was reimposed Sunday, kicking off a high-stakes battle over federal spending with dire implications for global financial markets.
A two-year deal to suspend the debt ceiling lapsed at midnight following inaction from Congress and President Biden to give the U.S. more borrowing authority. The Treasury Department will now begin taking what it refers to as “extraordinary measures” to prevent the U.S. from defaulting on its debt.
Those steps are likely to avert a default until October or even November before Biden will need to sign a bill to raise or suspend the limit again.
The expiration of the debt limit has triggered numerous partisan standoffs over the past decade, most recently in 2019. Each time, Congress has raised or suspended the debt limit. But the weeks before a potential default have often been the most tense, both for financial markets and administration officials.
“I respectfully urge Congress to protect the full faith and credit of the United States by acting as soon as possible,” Treasury Secretary Janet Yellen wrote in a letter to congressional leaders last week, warning that they risked “irreparable harm to the U.S. economy and the livelihoods of all Americans” by delaying action.
There is no clear path to a bipartisan agreement as Republicans hold out for spending cuts that Democrats refuse to consider.
While Democrats have slim majorities in both the House and Senate, they will still need the support of 10 GOP senators to avoid a filibuster on legislation to raise or suspend the debt ceiling.
Republican leaders have told Democrats that there can be no bipartisan debt ceiling agreement without a slate of debt reduction measures targeting the roughly $28 trillion national debt. Several GOP lawmakers have floated a deal similar to the 2011 Budget Control Act, which ended a debt ceiling standoff shortly before the U.S. suffered its first ever credit downgrade.
Democrats, however, argue that tying a debt ceiling increase to any controversial legislation is akin to holding the financial system hostage.
Without help from Republicans, Democrats would have to approve a debt ceiling hike through a budget reconciliation measure, which only needs a simple majority to pass in each chamber but would require support from all 50 Senate Democrats.
The Congressional Budget Office (CBO) estimated in June that Congress likely has until October or November before the Treasury Department exhausts its extraordinary measures and the ability to pay government bills on time. But both CBO and Treasury have warned that the U.S. could be on the verge of default soon after lawmakers return from a planned summer recess in September, when they will face a time crunch on passing legislation to avoid a government shutdown on Oct. 1.
Yellen has also said uncertainty driven by the coronavirus pandemic and the federal government’s fiscal response has made it harder to pin down exactly how long the U.S. to avoid a default.
The debt ceiling does not directly prevent the government from spending money, nor can it void any bills the U.S. has to pay. The limit simply prevents the Treasury from taking on any more debt to pay expenditures already authorized by the president and Congress.
Defaulting would likely cause a massive disruption to markets and the economy. Trillions of dollars in Treasury bonds held by foreign governments and investors are underpinned by faith in the federal government’s ability to pay its bills. A default on the national debt could shatter that confidence and trigger a catastrophic financial crisis.
Nonpartisan experts have urged lawmakers for years to consider alternatives to the debt ceiling, warning that even the prospect of a default hinders the financial system in dangerous ways.
A 2015 report from the Government Accountability Office analyzing the 2013 debt ceiling standoff found that “investors reported taking the unprecedented action of systematically avoiding certain Treasury securities,” which are considered almost as safe as cash, causing widespread issues across credit markets.
“Industry groups emphasized that even a temporary delay in payment could undermine confidence in the full faith and credit of the United States and therefore cause significant damage to markets for Treasury securities and other assets,” the report said.