Within the next few weeks, if the government’s borrowing authority is not raised, the United States will not be able to pay its bills and will default on its loans.
The debt limit, a cap that Congress places on the U.S. government’s ability to borrow, has been raised 100 times since it was enacted in 1917, 80 of those times since 1960. This round of negotiations, however, has hit a sticking point with Democrats and Republicans still far apart on getting the limit raised.
Currently, the U.S. government enjoys a low interest rate when it comes to borrowing money, because the country pays its debts and pays them on time.
According to the Brookings Institution, that reputation of paying on time translates to a low interest rate that, in turn, accounts for nearly $700 billion in interest payment savings a year.
What could happen in the next few weeks puts all of that, and a lot more, in jeopardy.
Treasury Secretary Janet Yellen, who says Oct. 18 is the day the U.S. runs out of money to pay its debts, says a default on debts would lead to “widespread economic catastrophe.”
While the exact date the country becomes unable to pay its debts is uncertain, a Sept. 29 Congressional Budget Office (CBO) report estimated that the Treasury would “probably be unable to make its usual payments starting in late October or early November.” What is certain is the economic damage missing debt payments would cause.
What happens if the debt limit isn’t raised? Here’s what we know now:
What is the debt limit?
The debt limit, sometimes called the debt ceiling, is the maximum amount the United States can borrow to pay the government’s debts. The debt limit covers over 99% of all federal debt.
Why does the federal government have the debt?
The government spends vast amounts of money each day. On Monday alone, the government spent $16.8 billion.
Federal programs, including Social Security, Medicare, and the Supplemental Nutrition Assistance Program (food stamps), are funded with money collected in taxes. When the government spends more on programs than it brings in in taxes and other revenue, it must borrow money to pay for those programs.
The CBO estimates that in fiscal year 2022 (which began on Oct. 1), the amount the federal government spends annually on programs will exceed federal revenue by approximately $1.2 trillion.
What does it mean to raise the debt limit?
To raise the debt limit means to allow the government to borrow more money to fund the programs currently in place.
Congress must approve any increase in the limit to the amount of money the federal government can borrow in order to pay its debts.
Once the debt limit is raised, programs will receive funds and government employees and members of the military will receive paychecks.
What does it mean if Congress fails to raise the debt limit?
“Every item of federal spending is going to be affected—whether you’re talking about payments that individuals receive, federal benefits, paychecks to civilian and military employees, grants to state and local governments—all of these are going to be touched,” Paul Van de Water, a senior fellow at the Center on Budget and Policy Priorities, told Fortune.
Included in that list are programs such as Social Security, Medicare and Medicaid, plus the paychecks of 1.4 million members of the U.S. military and nearly 3 million government employees.
The recent Child Tax Credit payments would be paused and funding for pandemic mitigation efforts would end.
Grants that states receive that cover things like school programs, Medicaid and public transit would dry up. Nearly a third of state spending nationally comes from the federal government.
Approval of a debt-limit increase to pay the nation’s bills is necessary to maintain the full faith and credit of the U.S. government.
For instance, if an individual fails to pay his or her bills, they become a credit risk, meaning it is more difficult to borrow money because creditors are not sure they will be paid back.
The same things happen when a country cannot pay its bills. Its credit rating falls and borrowing money becomes more expensive because the government will be charged a higher rate of interest on loans.
If the limit is not raised, would the government prioritize who gets paid first?
According to the Department of the Treasury, there is no plan for prioritizing what gets paid and what doesn’t.
What is the debt limit now?
The debt limit today stands at $28.4 trillion.
When was the last time it was increased?
A budget measure passed in 2019 suspended the debt limit for two years. That suspension expired on Aug. 1.
How are we paying for it now?
As of now, the government is paying for programs by using what is called “extraordinary measures” to extend how long it can continue to pay all the government’s obligations while staying below the limit.
According to the White House, “these measures include accounting techniques within several government accounts that temporarily reduce the amount of U.S. Treasury securities issued to those accounts. These actions include suspending new investments or redeeming existing investments early. By reducing the amount of outstanding Treasury securities, the level of outstanding debt temporarily falls, slightly extending the amount of time that the government can continue to satisfy its obligations.”
Money saved in those measures and used to fund other programs currently will run out within the next few weeks.
Hasn’t it been raised many times before?
Yes, about 100 times since its inception in 1917.
What is the difference between a debt-limit increase and a shutdown of the federal government?
A shutdown of the government happens when annual funding for ongoing federal government operations expires and Congress does not renew it by Oct. 1, the first day of the fiscal year.
Failure to raise the debt ceiling means the government cannot borrow money to pay for government programs.