The U.S. hit the debt ceiling. Here’s what that means

The USA hit its debt restrict, often known as the “debt ceiling,” on Thursday, Jan. 19, prompting the Treasury Department to take “extraordinary measures” to maintain paying the federal authorities’s payments.

A number of readers like Ryan and Kathy reached out to VERIFY with questions in regards to the debt ceiling, together with when it was final raised and the way the nationwide debt is calculated. 

Listed here are VERIFIED solutions to 5 key questions in regards to the debt ceiling.  

What’s the nationwide debt? 

Earlier than we reply what the debt ceiling is, we have to perceive the nationwide debt. 

The nationwide debt, which currently stands at approximately $31.5 trillion, is the sum of money the federal authorities has borrowed to cowl bills. 

Kathleen Day, a finance professor on the Johns Hopkins Carey College of Enterprise, described the nationwide debt because the “accumulation of deficits through the years.” 

A budget deficit is the results of the federal government spending more cash than it receives in income from taxes and different sources in a given yr. The Treasury then has to borrow cash to ensure that the federal authorities to maintain paying its payments. 

What’s the debt ceiling? 

The current federal debt limit, often known as the debt ceiling, is $31.4 trillion.

However what precisely is the debt ceiling? It’s a restrict imposed by Congress on how a lot cash the federal authorities can borrow to satisfy its present authorized obligations. These obligations embody Social Safety and Medicare advantages, army salaries, curiosity on the nationwide debt, tax refunds and different funds, the Treasury Department says.

Rising or suspending the debt restrict doesn’t authorize new spending or value taxpayers cash, Treasury Secretary Janet Yellen wrote in a letter to Congress on Jan. 13, 2023.

The debt restrict was established in 1917 by the Second Liberty Bond Act, according to the Committee for a Responsible Federal Budget (CRFB).

Earlier than the debt ceiling was created, “debt was micromanaged by Congress, not the Treasury,” Louise Sheiner, an economics fellow with the Brookings Establishment, defined. 

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When was the debt ceiling final raised?

VERIFY reader Ryan requested if the debt ceiling was final raised throughout former President Barack Obama’s administration. The debt ceiling was really raised extra not too long ago than that. 

In December 2021, Congress passed legislation elevating the debt ceiling by $2.5 trillion to its present restrict of roughly $31.4 trillion. 

Congress has authorised greater than 100 separate adjustments to the debt ceiling because the finish of World Warfare II, in keeping with a November 2022 report from the Congressional Research Service (CRS). The debt ceiling has been raised 20 instances since 2001.

“Will increase in spending on old-age and retirement packages, decrease tax receipts, and federal actions associated to the Nice Recession and in response to the COVID-19 pandemic have all contributed to rising debt ranges,” CRS wrote within the report. 

What occurs when the U.S. hits the debt ceiling? 

When the U.S. hits the debt ceiling, prefer it has in 2023, that doesn’t imply it can routinely default on its obligations like Social Safety and Medicare advantages.

Although the Treasury can’t borrow more cash as soon as it hits the debt ceiling, it may possibly implement what are referred to as “extraordinary measures” to proceed paying the federal authorities’s payments. The Treasury indicated that it began taking those measures on Jan. 19, 2023. 

These measures embody issues like placing a maintain on contributions to authorities employees’ retirement funds, however changing the cash later, Sheiner defined. However these measures gained’t affect the typical American’s pockets on a day-to-day foundation, she mentioned. 

“Extraordinary measures are actually simply methods of getting across the debt ceiling,” Sheiner mentioned. 

What may occur if Congress doesn’t increase the debt ceiling in time?

It’s unclear precisely what would occur if Congress doesn’t attain a deal on the debt ceiling in time and the Treasury runs out of cash-on-hand.

“[The Treasury is] principally confronted with two units of inconsistent legal guidelines: they can not borrow, they usually should make these funds – to curiosity funds, to Social Safety beneficiaries, to the hospitals who’re protecting Medicare beneficiaries,” Sheiner mentioned. 

Within the case of default, the federal authorities might need to overlook or delay funds reminiscent of these for Social Safety and Medicare beneficiaries and authorities employees’ salaries, Sheiner and Day defined. 

The federal authorities “has not skilled a significant default on its monetary obligations because the Warfare of 1812,” the Bipartisan Policy Center says. 

If the federal authorities defaults on its obligations, monetary specialists like Day warn that it may have disastrous penalties.

A default would “spoil our popularity” within the international financial system and the price of borrowing at house would rise “astronomically,” Day mentioned. It could doubtless trigger the inventory market to fall as properly and probably value tens of millions of jobs, she added.