It’s OK if you don’t regularly follow the news or consider yourself a “finance bro.” I’m going to answer some questions that will relay what you need to know about the U.S. debt ceiling conversation.
Throughout the month of January, a popular topic in politics has been the status of the country’s debt ceiling. However, the real discussion of the debt ceiling was brought to everyone’s attention on Jan. 19, when the government almost hit its $31.4 trillion borrowing limit.
What is the debt ceiling?
Before contemplating how concerned you should be, you first need to have an understanding of what the debt ceiling is. The debt ceiling is the approximate limit, specifically of the money that the federal government can borrow in a given year. The limit is raised by Congress and the process is watched by the United States Department of the Treasury.
The government is not allowed to borrow money and spend it however they like — there are restrictions. The federal government can only utilize the money borrowed to fulfill its legal obligations, and pay for things like military salaries, tax refunds, Social Security and Medicare.
The debt ceiling was first established in the United States in 1917, in the Second Liberty Bond Act, with a limit that was set at $11.5 billion. Given that the current debt ceiling is set at $31.4 trillion, the debt limit has gradually increased to meet the changing needs of the country as well as account for inflation. The current debt limit was set in S.J.Res.33, a joint resolution from 2021.
How concerning is it to hit the debt ceiling?
It’s relatively uncommon to hit the debt ceiling, which explains why this has actually never occurred in the United States. This isn’t too surprising, especially considering that the federal government can pass new bills to raise or suspend the debt limit. If the debt ceiling is not raised or suspended, the U.S. government could default.
Defaulting is essentially failing to repay a loan, and when considering that the “loan” we’re talking about is for over $31 trillion dollars, the implications could be devastating.
What are the implications?
The United States exceeding its debt limit would have dire consequences. Interest rates in the Treasury would rise, and consequences would spread to the interest rates of the public. This could affect investments, loans for cars and houses, and copious other aspects in our economy.
Another implication of the country exceeding its debt limit would be a government shutdown.
What’s Congress doing about it?
Many financial groups are pushing for Congress to act quickly, but in reality, this issue will not likely be resolved for several months. The current makeup of our federal government will also elongate this timeline, as many policies will be tacked onto the new bill that will raise the limit. It is estimated that the executive branch will wait until after tax season in April to prioritize efforts in increasing the debt limit.
In the meantime, we will have to wait and see what steps Congress takes toward raising the debt ceiling.