The U.S. has hit the debt limit. Now what?
A political battle is brewing on Capitol Hill with potentially dire economic consequences looming after the U.S. hit the debt limit on Thursday. Lawmakers must reach an agreement to either raise or suspend the debt limit to avoid a credit default, which would mean the government couldn't pay its bills and would default on its debt obligations for the first time ever.
Raising the debt limit would increase the amount the U.S. can borrow to meet its spending obligations. Suspending the debt limit means Congress freezes it until a specific date and then, as the Committee for a Responsible Federal Budget puts it, "sets an automatic catch-up," so that when that date arrives, the debt ceiling is raised to meet the current level of spending. For instance, the Bipartisan Budget Act of 2019 suspended the debt limit until July 31, 2021, and provided a "catch-up" that raised the debt limit by $6.5 trillion.
The Treasury Department on Thursday started using so-called extraordinary measures to pay the bills, which Treasury Secretary Janet Yellen predicts can delay default for a few months, until around June.
The U.S. debt currently has a $31.4 trillion limit. The last time Congress moved to raise the debt ceiling was in December 2021 when Democrats were able to pass legislation without a single Republican vote. But the current makeup of Congress poses greater challenges for reaching an agreement on the debt limit in time, since Republicans now control the House.
In recent decades, Republicans have used the debt ceiling as a tool to push for spending cuts, arguing that the nation needs to rein in wasteful spending. Democrats liken these tactics to hostage taking and accuse GOP lawmakers of manufacturing a crisis.
Before raising the debt limit in 2021, Congress had voted to suspend the debt ceiling several times since 2013, and three times under President Donald Trump. The national debt rose from under $20 trillion when he took office to more than $27 trillion by the time he left office in early 2021, including a suspension of the limit in 2019.
If Congress does not reach an agreement and the U.S. defaults on its obligations, it is expected to have severe effects on the economy and would almost certainly roil the financial markets globally. Millions of Americans could see higher borrowing costs and delays in receiving government checks like Social Security or military pay.
While it remains unclear what Congress will do, here are some options being floated to address the burgeoning debt crisis:
Clean debt limit bill
The White House has said the debt limit should be addressed without conditions and will not negotiate. This amounts to a demand that Congress pass a clean debt limit bill. But House Republicans have pushed back on this – arguing any debt limit bill needs to be paired with spending cuts.
Another option floated by some policymakers is a clean debt ceiling bill that includes the creation of a committee to recommend improvements to tax and spending policy going forward and address putting the U.S. on a more sustainable fiscal path.
Debt and spending deal
But House Speaker Kevin McCarthy signaled this week he will seek legislation that addresses both the debt limit and spending.
"Why wouldn't we sit down now, set a budget, set a path to get us to a balanced budget and let's start paying this debt off," McCarthy said Tuesday. He called on President Biden to come to the table and negotiate. He's previously pointed to the spending deal reached by Trump and House Speaker Nancy Pelosi. But it is unclear whether an actual agreement with spending caps that still addresses the debt limit could pass in the closely split Congress with a growing number of hardline Republicans.
Far-right Republicans want to see cuts to mandatory spending, which would include Social Security and Medicare. However, most Republicans are not likely to support cuts to those programs.
While Republicans hold the majority in the House, the close margins likely mean the solution will ultimately need bipartisan support.
This week House Minority Leader Hakeem Jeffries said "reasonable Republicans" need to emerge to avoid a default. While some Democrats have signaled the party should not negotiate, others have signaled a willingness to discuss some spending cuts, Democrats have drawn a hard line that they will not jeopardize priorities such as Medicare, Social Security or national security.
Republicans and prioritization
Economists, many lawmakers and policy experts argue default is simply not an option because of the likely catastrophic economic consequences. If the U.S. defaults on obligations, it would put the U.S. in uncharted waters. During past showdowns, some Republicans have suggested directing the Treasury to prioritize what payments are made should the U.S. reach the point of not being able to pay the bills, and according to the Washington Post, such a proposal is under discussion right now.
But experts warn this would not prevent the U.S. from suffering the economic consequences associated with default. Prioritization efforts would almost certainly result in legal fights. In 2011 the Obama administration argued debt prioritization was unworkable because it would not be able to keep up — the government computers makes millions of payments daily.
Wendy Edelberg, director of the Hamilton Project and a senior fellow in economic studies at Brookings, said a bill telling the Treasury how to prioritize payments would be really alarming.
"What that suggests to me is that there are members of Congress who are interested in planning for a crisis rather than avoiding a crisis," she said.
Eliminating the debt ceiling
The U.S. has had a limit on federal debt since the passage of the Second Liberty Bond Act of 1917, and a more general limit was placed on the debt in 1939.
Some Democratic lawmakers have previously called for the elimination of the debt limit altogether, though this is an unlikely option. Increasing the debt limit does not green light new spending. It simply allows the United States to pay the bills it has already racked up with debts amassed under multiple administrations from both parties.
"Once Congress passes spending policy and tax policy, it has effectively committed itself to a future path of borrowing, and so the way for [Congress] to change how much Treasury is going to have to borrow is for it to change tax and spending policy," Edelberg said.
U.S. budgets have been passing with bipartisan support, not just by one party.
Changing the pathways to address the debt
Apart from dealing with the debt ceiling through the current processes where negotiations have run into the 11th hour in recent years, there have been calls not to eliminate the debt limit but to reform the entire process. The Responsible Budgeting Act is one such option that was introduced in 2021 which provides two separate paths to address the debt limit without the looming doomsday risk of default. One path allows the presidents to suspend it if Congress passes a concurrent budget resolution that's fiscally responsible. If that doesn't happen it paves the way for the president to act alone.
Shai Akabas from the Bipartisan Policy Center, which has worked with lawmakers on the bipartisan legislation, said it recognizes that the entire current budget process is largely broken and such an effort would help move the debate to policies producing the deficit while mitigating the debt limit risk.
"Most people will view this as better than either defaulting on our obligations or banging our heads against the wall each year again and again and again," he said of the legislative proposal.
Mint a trillion-dollar coin
When the debt limit debate comes up – inevitably so does the last-ditch solution that the Treasury could simply mint a trillion-dollar coin. The idea stems from a loophole in a 1997 law that grants the Treasury the authority to mint platinum coins of any denomination.
Some lawmakers have called for it during past debt limit showdowns – but Treasury Secretary Janet Yellen, who also previously served as Federal Reserve chair, opposed the idea during the last round of debt ceiling negotiations in 2021, during which she called it a gimmick and said it undermines the independence of the Federal Reserve.
Like defaulting, it's never been done before, so this kind of move would be destined for a legal showdown while also introducing a new element of uncertainty to the financial markets.
