The US hits its debt limit – what now?

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The United States on Thursday hit its debt ceiling, the cap on how much money the government can borrow to pay its financial obligations. Federal lawmakers debate and raise the limit to ensure our government does not default on its payments. It’s become an increasingly divisive issue.

These are the most critical questions and dynamics to consider as Congress and the White House negotiate.

Why does the U.S. even have a debt ceiling vote?

“America is essentially the only country that requires a separate debt ceiling vote,” Richard McGahey, an economist at the New School’s Schwartz Center for Economic Policy Analysis, wrote.

“Raising the debt ceiling doesn’t authorize any new spending. It’s basic accounting for programs already enacted into law, as tax revenues don’t fully cover spending.”

Who are the key players?

The House Ways and Means Committee is “arguably the most powerful” one in Congress, Koltun noted. It has jurisdiction over the federal government’s authority to borrow money, including setting the debt ceiling. The committee has a new leader: Representative Jason Smith, a Republican from Missouri.

“I’m a working-class, you know, hillbilly from southeast Missouri,” Smith told Roll Call in an interview last year. “Do I bring a firebrand to the committee? Absolutely. But I’m reflective of our party.”

How did the chaotic House Speaker race affect the debt limit?

Suppose House Speaker Kevin McCarthy, a Republican from California, was to reach a compromise with Democrats. In that case, far-right members of his own party could either block a vote or remove him as speaker.

McCarthy was forced to bow to many of those Republicans’ demands to secure the speakership on 15 ballots — the longest contest since before the Civil War.

“McCarthy’s concessions to the far right in that process will leave him as the weakest speaker in generations and likely lead to the most dangerous game of budget brinkmanship in Washington since 2011,” Ritz wrote. “Leaders across both parties must work quickly to avoid an unprecedented debt default disaster.”

Ideally, policymakers avoid an impasse by negotiating to raise or reform the federal debt limit and separately enact a sound bipartisan plan to get the nation’s debt under control.

Could U.S. debt be downgraded?

U.S. debt entered 2023 rated AA+ by S&P after the 2011 downgrade — the first in the nation’s history. Many factors determine the calculation of a country’s credit rating.

“This prompts memories of 2011, where the debate over raising the debt ceiling took the U.S. to within two days of default, jolting equity markets and contributing to a government debt downgrade,” Moore wrote. “The political stage from then is broadly similar to now, with Republicans controlling the House and a Democratic president.”

How the rating agencies will react to potential events around debt ceiling negotiations is still to be determined.

How does Congress avoid damaging gridlock?

Behold the “trillion-dollar platinum coin.”

“It may sound like a gag, but there are serious people who argue the Treasury Secretary has the legal authority to mint such a coin and use it to back up government spending — without raising the debt limit,” McGahey wrote.

Other, less gimmicky possibilities include invoking the 14th Amendment, but that path includes legal questions.

“In addition to its anti-slavery provisions, the amendment (section 4) says ‘the validity of the public debt…shall not be questioned,’” McGahey added. “The provision was added so former Confederates in Congress couldn’t overturn paying Union military pensions and other war costs.”

What are extraordinary measures?

The government reached its debt limit on Thursday, and Yellen was expected to begin taking “extraordinary measures” to avoid a default.

“The term is dramatic, but these are really just accounting steps to reduce burdens on the Treasury,” McGahey explained. “They include investment sales (to raise cash), not reinvesting several government retirement funds (again holding the cash and not generating new debt), and not reinvesting cash in a fund for foreign currency stabilization.”

They will create some budget room, but if Congress fails to raise the limit by June, a major economic crisis will result.