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? Included in that list are programs such as Social Security, Medicare and Medicaid, plus the paychecks of 1.
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. 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. Now the question comes up every few years. The US has a legal limit on the amount of federal debt it can issue, which Congress has to raise or suspend every so often to continue paying its bills.
This borrowing, mind you, is for spending that Congress has already approved. You can see the ever so slight risk of a US default in the yield curve for Treasury bills—investors are demanding a tiny bit of extra compensation to hold the securities that come due in mid-October. Investors are only getting a few extra basis points if they buy bills that mature around October 18, which suggests traders think the probability of a default is pretty remote.
Yields increased by substantially more when Congress played chicken with the debt limit in , rising by some 40 basis points or more as politicians waited until the last moment to authorize more borrowing, according to the Brookings Institution, a think tank.
If history is any guide, markets will get increasingly jumpy the longer politicians take to address the borrowing limit. Playing chicken with the debt ceiling comes at a cost. If the Treasury ran out of headroom to pay its bills, officials would probably delay payments to agencies, Social Security beneficiaries, Medicare providers, and contractors—and would continue paying interest on Treasury securities and avoid a default, according to Brookings. This maneuver might protect investors in Treasury notes and bonds, but it would hardly instill confidence in the US government.
Federal law puts a cap on the total amount of money the government may borrow from the public or from its own reserves such as the Social Security trust fund. Lawmakers have raised the debt limit repeatedly over the last century, and in they suspended it entirely. It kicked back in automatically on Aug.
Threats against members of Congress are skyrocketing. In a year that kicked off with the Jan. Failing to lift the limit would force the federal government to renege on commitments it has already made, simply because Washington cannot maintain the status quo in federal programs without borrowing more money and going deeper into the red.
What would happen next is a bit of a mystery, given that the federal government has never deliberately failed to make a payment. An actual default would raise U. There would be consequences for the global financial system too. A default could trigger a wave of actions against borrowers who put up Treasury securities as collateral, leading to a debt sell-off and a damaging reduction in the availability of credit, Zames said.
The potential result, he said, was another recession. With the U. Some opponents of raising the debt limit argue that Washington could avoid defaulting by using incoming tax revenue to cover interest payments on U. There are at least two problems with the idea.
According to a report from the Congressional Research Service , however, the Treasury Department insists that it has no authority to treat some payments as more important than others, even if it would be wise to do so. Prioritizing payments because of a debt-limit impasse, the report said, could constitute the sort of action prohibited by the act, which bars the administration from delaying or withholding spending for policy reasons.
A third issue is more practical. As Treasury officials have said several times over the years, the department is not set up to pick and choose which obligations to pay.
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