The federal government hit the debt ceiling on January 19th, prompting a scramble to keep paying its bills and a political battle in Congress that could have serious economic consequences.
When the federal government spends more than it has raised in taxes (deficit spending), it takes on debt to pay for its various programs and agencies. The U.S. Treasury finances deficit spending by selling bonds to the public, with a promise to pay the money back with interest. In 1917, Congress imposed a debt ceiling, which limits the amount of borrowing the government can do. It’s akin to a credit limit (all too familiar to the broke college student) but on a much bigger scale. The ceiling has been raised or suspended 78 times since it was created. The most recent increase was in December of 2021, with the ceiling currently standing at $31.381 trillion.
Treasury Secretary Janet Yellen (she/her) has taken what are called “extraordinary measures” to ensure that the government will continue to pay its obligations. These actions include suspending reinvestment into federal employee retirement funds. She warned of severe economic consequences, telling news website Axios that a default would trigger “a financial crisis.” Yellen says these measures will only last until around June 5th. In order to prevent the federal government from defaulting on its loans, Congress will need to raise the debt ceiling before that date. However, with Democrats controlling the Senate and Republicans controlling the House, a divided Congress jeopardizes this possibility.
Some members of the Republican party are looking to use the looming debt ceiling as a bargaining chip to force cutbacks in federal spending. Some argue that continuing to raise the debt ceiling only exacerbates financial instability, and they want the government to take measures to reduce the deficit. Reuters reported on January 27th that two dozen Senate Republicans released a letter demanding that an increase in the debt ceiling be matched by an equal reduction in federal spending. Republicans will need to decide what programs they are advocating cuts for, which could be politically difficult when funds for programs like Medicare and Social Security make up large portions of the budget but remain popular among their constituents.
Democrats have pushed back against the Republican proposals. The White House press secretary Karine Jean-Pierre (she/her) told reporters, “We will not be doing any negotiation over the debt ceiling” and cited bipartisan efforts to raise the debt ceiling in the past. House Speaker Kevin McCarthy (he/him, R-CA) and President Biden (he/him, D) are scheduled to meet on February 1st.