On Tuesday, President Biden met Republican Speaker Kevin McCarthy to resume the high-stakes negotiation on what is known as the U.S. debt ceiling.
There are dire predictions of global financial chaos if US Congress can’t agree on a deal.
What is the Debt Ceiling?
The US debt ceiling refers to the statutory limit set by Congress on the total amount of debt that the US government can issue.
Essentially, it puts a cap on the amount of money the government can borrow to fund its operations and meet its financial obligations, including paying for expenses such as federal employee compensation, Social Security, Medicare, military/defense spending, as well as interest on the national debt and tax refunds.
Every so often, US Congress votes to raise or suspend the ceiling so it can borrow more.
The federal debt ceiling was last increased in December 2021, by $2.5 trillion, to roughly $31.4 trillion. That limit was reached in mid-January. Since, the Treasury Department said it has taken “extraordinary measures” to avoid falling into default on their debt, though Treasury Secretary Janet Yellen warned that without more borrowing, the US will not have enough money to meet all of its financial obligations as soon as June 1.
Usually, it’s a formality for Congress to raise the limit as needed, but this time there is disagreement on the terms.
This year, Republicans have vowed to increase the debt ceiling so long as it’s suggested spending cuts are enacted. President Biden, however, wants to see an increase in the debt ceiling separate from any budgetary changes.
What Happens If the Debt Ceiling Isn’t Raised?
It’s not entirely clear what would happen if the debt ceiling isn’t raised, because it’s never happened before, but it’s fair to say it would cause major economic damage.
- The government would no longer be able to pay the salaries of federal and military employees, as well as veterans’ benefits.
- Social Security and Medicare — of which 66 million Americans rely on — would stop.
- Companies and charities that count on the government funds would be in peril.
- The US would not be able to invest in future projects.
In addition, if the government stops making interest payments on its debt, the US would be in default. This happened briefly in 1979, which the Treasury blamed on an accidental check processing issue, but an intentional default would shock the financial system.
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