Last year, a stalemate between President Joe Biden and congressional Republicansover the debt ceiling prompted panic among financial analysts and everyday Americans alike. The deal they struck, called the "Fiscal Responsibility Act," caps annual discretionary spending for two years. It also pushes the next action on the federal debt ceiling until after the 2024 presidential election.
Aspartisanshiphas become further entrenched across the country and especially in Washington, a previously routine congressional vote has emerged asa lightning rod for debateover government spending.
Here's what to know about the debt ceiling, why it gets raised, and what happens if we default:
What is the debt ceiling?
The debt ceiling is the limit placed by Congress on the amount of debt the government can accrue. In order to pay its bills to those it borrowed from and dole out money for everything from Medicare benefits to military salaries, the government needs more money, so the debt ceiling has to be raised.
Created in 1917, the legislative cap has to be raised by a majority vote in both the Senate and the House of Representatives. That vote does not pledge any additional spending. It merely raises the limit on the amount of money the government can borrow to pay back commitments already agreed upon by Congress.
However, over the years both parties have tied it to government spending and used the debt ceiling as a cudgel to force the hand of the president.
Republicans, who have a majority in the House, wanted tocut government spendingand refused at first to raise the debt ceiling until Biden and Democrats agreed to spending reductions. Biden and Senate Democrats, however, argued that any debate about government spending should be separate from a vote on raising the debt ceiling.
When is the debt ceiling deadline?
The current debt limit suspension ends on January 1, 2025. The agreement allows a few extra months for the Treasury Department to use “extraordinary measures” to pay the bills, NBC reported.
What happens if the debt ceiling is reached?
The U.S. did reach the debt ceiling last year, in late January.Following that, Treasury Secretary Janet Yellen said “extraordinary measures” were taken so the country could pay its bills and avoid default as the two parties battled it out. A default would occur if the U.S. failed to pay bondholders who have lent money to the government.
What happens if the government defaults on the debt?
The United States has never defaulted on its debts. That’s part of why U.S. Treasury bonds are viewed as a safe investment and used by some banks as a backstop to counteract risky investments.A defaultwould throw both the domestic and global economies into chaos.
The U.S. Treasury website warns that a default on the debt “would precipitate another financial crisis and threaten the jobs and savings of everyday Americans.”
In 2013, when the government careened toward default before raising the debt limit at the last minute, the economylost 1% of GDP.
When was the last time the debt ceiling was raised?
The ceiling is routinely raised to accommodate repayment of the country’s debt. The last timeit was raised was in 2021. The debt ceiling was suspended last June. Where raising the debt limit sets a specific cap, a suspension declines to set a dollar amount.
Days before a looming debt ceiling default, President Joe Biden and House Speaker Kevin McCarthy struck a deal to suspend the debt ceiling limit in exchange for caps on future spending and other demands from the GOP.
While it has become increasingly politicized, for years it was viewed more as a bureaucratic government business than a mechanism for policy change.
In 2011, then-President Barack Obama and Republicans in Congress reached a stalemate, but they agreed on a deal to raise the ceiling just two days before the Treasury would have run out of money.
What does the 14th Amendment have to do with the debt ceiling?
As fear grew last year over the failure to reach a deal on raising the debt ceiling, the White House was said to be considering an option of last resort: an untested legal theory that involvesinvoking the 14th Amendment.
After a meeting with congressional leaders on May 9, 2023 President Biden told reporters he had not ruled it out as an option.
The 14th Amendmentdeals mainly with equal protections granted to citizens under the law. However,the fourth sectionreads: "The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned."
Some legal scholars believe Biden could draw upon this clause to claim that he has the power to authorize the Treasury to repay U.S. debts even if Congress does not raise the ceiling. The move, considered but ruled out by the Obama administration, would likely get caught up in the courts.
How many countries have a debt ceiling?
Denmark also has a debt ceiling. However, it does not share in the same debate or political brinkmanship.
For one, parliament has more principal power in the Danish government, preventing the kind of legislative-executive branch showdown seen in the U.S. Additionally,CNN reports,Denmark is more fiscally conservative than the U.S., so it has less debt and set its original ceiling much higher than its actual debt levels.
What does it mean to raise the debt ceiling?
Raising the debt ceiling means increasing the amount of debt the country can accrue in order to pay its bills.
It is unrelated to future spending and is instead a limit on the amount of money the government can borrow to meet its existing legal obligations like payments toSocial Security and Medicare.
U.S. government bonds have long been viewed as a safe investment because debts are always paid back on time. However, if the US were to default and for the first time in history fail to pay back those debts the value of government bonds would depreciate and the global market would enter a tailspin. Treasury bonds are used as collateral for loans internationally as well as to cushion bank losses, among other things.
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Contributing: Clare Mulroy, Paul Davidson
