Debt Ceiling Live Updates: Senate Passes Bill, Sending It to Biden

What is the debt limit?

The debt limit is a ceiling on the total amount that the United States can borrow to fund the government and meet its financial obligations.

Because the federal government runs budget deficits — that is, it spends more than it collects in taxes and other revenues — it has to borrow vast sums of money to pay its bills. These commitments include funding for social safety net programs, interest on the national debt, and salaries for military personnel.

Approaching the debt ceiling often leads to calls from lawmakers to cut government spending. But lifting the debt ceiling doesn’t really authorize new spending – rather, it just allows the United States to spend money on programs already approved by Congress.

When was the debt limit reached?

The United States officially hit its debt ceiling on Jan. 19, prompting the Treasury Department to conduct accounting maneuvers known as extraordinary measures to continue meeting government obligations and avoid a default. These measures temporarily curb certain government investments so that bills can continue to be paid.

Treasury Secretary Janet L. Yellen has warned lawmakers that the United States could run out of cash in early June unless the borrowing limit is raised or suspended.

How big is the US debt?

The national debt exceeded the 31 trillion dollar mark for the first time last year. The credit limit is $31.381 trillion.

Why is there a debt limit in the US?

The constitution requires Congress to approve government borrowing. In the early 20th century, the debt limit was introduced so that the Treasury Department would not have to seek permission from Congress each time it had to issue debt to pay bills.

During World War I, Congress passed the Second Liberty Bond Act in 1917 to give the Treasury Department more flexibility in issuing debt and managing federal finances. The debt limit took its present form in 1939, when Congress combined various limits set for different types of borrowing into a single borrowing limit. At that time the limit was 45 billion US dollars.

Although the debt ceiling was created to make governance smoother, many policymakers feel it has caused more trouble than it’s worth. In 2021, Ms Yellen said she supports getting rid of the debt limit.

What happens if the debt limit is not raised or suspended?

If the government exhausts its extraordinary measures and runs out of money, it would not be able to issue new debt. That means it wouldn’t have enough money to pay its bills, including interest and other payments to bondholders, military salaries, and pension benefits.

No one knows exactly what would happen if the United States got to that point, but the government could not service its debt if it were unable to make the required payments to its bondholders. Economists and Wall Street analysts warn that such a scenario would have devastating economic consequences and could plunge the entire world into a financial crisis.

Will Military Salaries, Social Security Benefits, and Bondholders Be Paid?

Various ideas have been put forward to ensure important payments are not missed – particularly payments to investors holding US debt. But none of these ideas have ever been tried, and it remains unclear whether the government could actually continue paying its bills if it couldn’t borrow more money.

One proposed idea is that the Treasury Department would prioritize certain payments to avoid defaulting on US debt. In this case, the Treasury Department would first pay out bondholders who own US Treasury bonds, even if doing so would delay other financial obligations such as government salaries or pension benefits.

So far, the Treasury seems to have ruled that out as an option. Ms Yellen said such an approach would not prevent a “debt default” in the eyes of the markets.

“All financial systems are designed to pay all our bills on time and on time and not prioritize one form of spending over another,” Ms Yellen told reporters earlier this year.