Debt ceiling debate explained amid global economic uncertainty

The U.S. government is inching closer to breaching the statutory debt limit, defaulting on its obligations and unleashing potentially disastrous economic consequences around the globe, Treasury Secretary Janet L. Yellen said in a letter to congressional leaders last week.

In the past, lawmakers in Washington have raised or suspended the debt limit on a bipartisan basis, though there have been political spats over the matter from time to time.

With Republicans — who have a different economic viewpoint than congressional Democrats and the White House — now in charge of the House, the politics around the ostensibly mundane issue have ratcheted up and the stakes couldn't be higher.

The debt limit or debt ceiling — the terms are used interchangeably — is a cap on the money the U.S. government can borrow to pay its bills. It does not authorize any new spending, but it allows the Treasury Department to finance the existing legal obligations already approved by Congress. While Treasury has the power to issue debt, Congress holds the power over how much debt it can issue.

The debt limit was last raised in December 2021 and stands at $31.4 trillion.

Ms. Yellen in her Jan. 13 letter to lawmakers said Treasury will have to resort to "extraordinary measures" to prevent the U.S. government from defaulting on its obligations if Congress doesn't act on the debt ceiling soon.

She warned that the government's outstanding debt is projected to hit its statutory limit on Thursday and Treasury may be out of options to pay U.S. bills come June.

The extraordinary measures Ms. Yellen referenced include suspending reinvestment in the Washington-based $748.1 billion Thrift Savings Plan's G Fund, or Government Securities Investment Fund.

There's now divided government in Washington, and segments of the new Republican majority in the House have signaled that they'd like to enact spending cuts in order to raise the debt ceiling.

"House Republicans want to come to the table with a number of different fiscal austerity measures, and Democrats and the White House are saying they don't want any strings attached to debt limit negotiations," said Rachel Snyderman, senior associate director of business and economic policy for the Bipartisan Policy Center. Democrats "want to have the debate over our fiscal policy in another medium," Ms. Snyderman added.

House Speaker Kevin McCarthy, R-Calif., told reporters at the Capitol on Tuesday that he'd like to sit down with congressional leaders and President Joe Biden to start having discussions about the debt limit with enough time before the June deadline. "Who wants to put the nation through some type of threat at the last minute with the debt ceiling?" he said. "Nobody wants to do that."

Mr. McCarthy likened the nation's debt to a massive credit card bill and said its spending behavior needs to change. "I don't see why you would continue the past behavior," he said. He added that Democrats should negotiate to "set a budget, set a path to get us to a balanced budget and let's start paying this debt off."

At the White House on Tuesday, press secretary Karine Jean-Pierre called Republican's tactics "brinkmanship that threatens the global economy."

Ms. Jean-Pierre reiterated the Biden administration's position that raising the debt limit is "something that should be done without conditions. We've been very, very clear about that. We are not going to be negotiating over the debt ceiling."

"Crossing that threshold would really be an unprecedented economic event with domestic and global implications," Ms. Snyderman said.

The U.S. has come close to breaching the debt ceiling before, notably in 2011 when congressional Republicans raised similar concerns over spending, but a deal was reached in time. However, that ordeal caused the stock market to sink, and the nation's credit was downgraded, Ms. Snyderman noted.

This time around, if a deal isn't reached in time, "We're confident the Treasury Department would be unable to pay a number of its bills in full and on time." Whether it could "prioritize some payments over others, like making good to our bond holders, paying interest and principal on our debt or paying Social Security and Medicare," is an open question, she added. "This really would be untested waters, legally and technically speaking."

Even a short-term impasse over the debt limit could lead to higher borrowing costs and liquidity concerns for the private sector, which would likely result in job and stock market losses, Ms. Snyderman said.

Though the stakes are high and with roughly five months until the debt limit is breached, Ms. Snyderman is optimistic financial disaster can be avoided.

"Both parties recognize the fiscal challenges this country faces," she said. "They have an opportunity now to come to the table and to have a fulsome debate, recognizing that they view the same challenge through a different lens, but time is of the essence to get those negotiations underway."