Federal debt limit fight: What it's all about, and why it matters
Treasury Secretary Janet Yellen testifies during a House Ways and Means Committee hearing in March. Credit: Getty Images / Drew Angerer
WASHINGTON — With the U.S. government on the verge of a potentially devastating default on its debts early next month, can the Democrats and Republicans agree on a face-saving way to allow more federal borrowing to pay the bills?
That’s a question President Joe Biden will try to answer in a meeting Tuesday with the four leaders of Congress at the White House after Treasury Secretary Janet Yellen last week announced the government could run out of money as soon as June 1.
Democrats and Republicans have staked out clashing positions on the debt limit.
Biden and Senate Majority Leader Chuck Schumer (D-N.Y.) have repeatedly insisted that Congress must pass a “clean” bill, without any conditions, to raise the federal debt limit until the end of 2024.
House Speaker Kevin McCarthy (R-Calif.) and his caucus have demanded trillions of dollars in cuts to discretionary spending over the next decade in exchange for raising the debt ceiling by $1.5 trillion or until March 31, 2024.
In the past, political parties under a divided government have found a way to a bipartisan debt-limit deal, said Frances Lee, a Princeton University professor of politics who has studied the history of how the political parties handle raising the ceiling on federal borrowing.
“I don’t see how both parties get out of this with their ‘red lines’ fully intact,” Lee said. “Consistent with this long history, I would expect to see McCarthy and Biden reach a deal.”
But Lee noted history is not always a good guide to the present. “There are no guarantees,” she said.
Following are questions and answers about the debt limit, why it matters and what might happen.
The federal government spends more money than it takes in from taxes and other sources, and issues debt through borrowing and other means to cover the deficit created by obligations approved by Congress.
And Congress has the constitutional and statutory authority to set limits on the amount of debt the federal government can accrue. It exercises this authority through the federal debt limit, or debt ceiling, which caps how much the government can borrow to pay for its obligations.
In December 2021, Congress approved an increase of the debt limit by $2.5 trillion to a total of $31.4 trillion — a limit the federal government reached in January.
Since then, the U.S. Treasury Department has used “extraordinary measures” to suspend or delay payments until it can no longer satisfy all the government’s obligations. Yellen said that date will be in “early June, and potentially as early as June 1.”
A lot. The U.S. government has never defaulted before. And even the threat of default can be expensive. The U.S. Government Accountability Office estimated that delays in raising the debt limit in 2011 led to an increase in Treasury borrowing costs of about $1.3 billion.
Failing to raise the debt limit even for a short time would be costly, the White House Council of Economic Advisers said last Wednesday. “There is broad consensus amongst economists that such an event would generate an entirely avoidable economic catastrophe,” it said.
Moody’s Analytics determined a short debt limit breach could lead to a decline in real gross domestic product, nearly 2 million lost jobs and an increase in the unemployment rate to nearly 5% from its current level of 3.5%.
Under a longer debt-limit standoff, Moody’s said, real GDP would decline more than 4%, costing the economy more than seven million jobs, pushing the unemployment rate above 8%, and dropping stock prices by almost 20%, which would wipe out $10 trillion in household wealth. Treasury yields, mortgage rates and other consumer and corporate borrowing rates would spike.
The House Republican majority, which has raised alarm about the government’s soaring debt, is using the debt limit as a lever to force Biden and the Senate Democratic majority to accept cuts and rollbacks of their Inflation Reduction Act.
On April 26, the House narrowly passed a bill to set discretionary spending at fiscal year 2022 levels and to cap annual spending growth at 1%, below the inflation rate for the past decade, and to cut budget deficits by $4.8 trillion over the next decade.
Biden and Democrats have demanded that Republicans pass a debt-limit increase without any conditions. Democrats initially had hoped to cut a deal with Senate Minority Leader Mitch McConnell (R-Ky.) to go around the House. But McConnell backs McCarthy and said Biden and McCarthy must work out a deal.
Democrats did not think McCarthy, who needed 15 rounds of votes to become Speaker, could produce a bill he could pass in his divided caucus. But he did.
Meanwhile, Wall Street experts and groups such as the Bipartisan Policy Center and the Committee for a Responsible Federal Budget, nonprofits that in the past urged quick approval of debt limit increases, are urging Biden to negotiate with House Republicans.
Biden, however, did not agree to open negotiations with Congress until last week, and only after Yellen warned the government would begin to run out of money in June.
That’s the big question before Biden’s White House meeting Tuesday with Schumer, McConnell, McCarthy and House Democratic Leader Hakeem Jeffries (D-Brooklyn).
Unless one side capitulates, any resolution likely will require compromise and votes from Democrats and Republicans in both the House and Senate.
Biden and Democrats have created some possible workarounds.
The White House, for example, is considering whether Biden could simply lift the debt limit based on the 14th Amendment language that the U.S. debt “shall not be questioned.”
And House Democrats have set in motion a rarely used discharge petition to force the House to take up a bill to raise the debt ceiling — although they would need five Republican votes to pass it, which is unlikely to happen.
Also, the moderate and bipartisan House Problem Solvers Caucus has proposed suspension of the debt ceiling until the end of the year to allow completion of a 2024 budget and creation of a fiscal commission to propose long-term solutions for the government debt.
Biden, who is scheduled to speak about the debt ceiling issue on Wednesday at Westchester Community College in Valhalla, has said he would negotiate with Republicans over federal spending measures separately from the debt limit.
McCarthy must tread carefully, given his party’s narrow majority of five votes that has empowered the conservative Freedom Caucus. Some caucus members have threatened to oust McCarthy as Speaker if he does not press for their deep cuts in spending.
Meanwhile, some in the White House and in Congress have begun talking about a short-term extension of the debt limit to allow more time to work out a deal, according to reports.
Going into the meeting Tuesday, both sides have hardened their positions.
Schumer on Friday doubled down on his rejection of any short-term debt-limit extension. Instead, he said, Congress should approve the motion he filed last Monday for a two-year suspension of the debt limit, until the end of 2024.
Over the weekend, Jeffries backed Schumer's position and Senate Republicans showed their support for McCarthy.
"I don't think the responsible thing to do is to kick the can down the road when President Biden has been saying, for months — the position of Leader Schumer, the position of House Democrats — has been we have to avoid a default," Jeffries said on NBC's Meet the Press Sunday.
Sen. Mike Lee (R-Utah) released a letter Saturday saying Republicans won't vote for a clean debt limit hike or to end a filibuster over such a hike. A total of 43 Republicans senators signed the letter, enough to sustain a filibuster against a clean debt limit increase.
“A lot is weighing on the meeting between the Big Four," on Tuesday, said G. William Hoagland, a senior vice president of the Bipartisan Policy Center.
“At least they're sitting down. And even though the president says [lifting the debt limit] is nonnegotiable, I think even the president at the end of the day will have to agree to have some form of a face-saving for McCarthy as well as for the administration,” he said.
“Any kind of any default,” Hoagland said, “is not going to work to the political benefit of either the president or Republicans.”
WASHINGTON — With the U.S. government on the verge of a potentially devastating default on its debts early next month, can the Democrats and Republicans agree on a face-saving way to allow more federal borrowing to pay the bills?
That’s a question President Joe Biden will try to answer in a meeting Tuesday with the four leaders of Congress at the White House after Treasury Secretary Janet Yellen last week announced the government could run out of money as soon as June 1.
Democrats and Republicans have staked out clashing positions on the debt limit.
Biden and Senate Majority Leader Chuck Schumer (D-N.Y.) have repeatedly insisted that Congress must pass a “clean” bill, without any conditions, to raise the federal debt limit until the end of 2024.
WHAT TO KNOW
- With the U.S. government on the verge of a default on its debts, can Democrats and Republicans agree on a way to allow more federal borrowing to pay the bills?
- President Joe Biden and Senate Majority Leader Chuck Schumer (D-N.Y.) insist Congress must pass a bill without any conditions to raise the federal debt limit until the end of 2024.
- House Speaker Kevin McCarthy (R-Calif.) and his caucus want trillions of dollars in cuts to discretionary spending in exchange for raising the debt ceiling by $1.5 trillion until March 31.
House Speaker Kevin McCarthy (R-Calif.) and his caucus have demanded trillions of dollars in cuts to discretionary spending over the next decade in exchange for raising the debt ceiling by $1.5 trillion or until March 31, 2024.
In the past, political parties under a divided government have found a way to a bipartisan debt-limit deal, said Frances Lee, a Princeton University professor of politics who has studied the history of how the political parties handle raising the ceiling on federal borrowing.
“I don’t see how both parties get out of this with their ‘red lines’ fully intact,” Lee said. “Consistent with this long history, I would expect to see McCarthy and Biden reach a deal.”
But Lee noted history is not always a good guide to the present. “There are no guarantees,” she said.
Following are questions and answers about the debt limit, why it matters and what might happen.
What is the debt limit?
The federal government spends more money than it takes in from taxes and other sources, and issues debt through borrowing and other means to cover the deficit created by obligations approved by Congress.
And Congress has the constitutional and statutory authority to set limits on the amount of debt the federal government can accrue. It exercises this authority through the federal debt limit, or debt ceiling, which caps how much the government can borrow to pay for its obligations.
In December 2021, Congress approved an increase of the debt limit by $2.5 trillion to a total of $31.4 trillion — a limit the federal government reached in January.
Since then, the U.S. Treasury Department has used “extraordinary measures” to suspend or delay payments until it can no longer satisfy all the government’s obligations. Yellen said that date will be in “early June, and potentially as early as June 1.”
What’s at stake?
A lot. The U.S. government has never defaulted before. And even the threat of default can be expensive. The U.S. Government Accountability Office estimated that delays in raising the debt limit in 2011 led to an increase in Treasury borrowing costs of about $1.3 billion.
Failing to raise the debt limit even for a short time would be costly, the White House Council of Economic Advisers said last Wednesday. “There is broad consensus amongst economists that such an event would generate an entirely avoidable economic catastrophe,” it said.
Moody’s Analytics determined a short debt limit breach could lead to a decline in real gross domestic product, nearly 2 million lost jobs and an increase in the unemployment rate to nearly 5% from its current level of 3.5%.
Under a longer debt-limit standoff, Moody’s said, real GDP would decline more than 4%, costing the economy more than seven million jobs, pushing the unemployment rate above 8%, and dropping stock prices by almost 20%, which would wipe out $10 trillion in household wealth. Treasury yields, mortgage rates and other consumer and corporate borrowing rates would spike.
How did we get here?
The House Republican majority, which has raised alarm about the government’s soaring debt, is using the debt limit as a lever to force Biden and the Senate Democratic majority to accept cuts and rollbacks of their Inflation Reduction Act.
On April 26, the House narrowly passed a bill to set discretionary spending at fiscal year 2022 levels and to cap annual spending growth at 1%, below the inflation rate for the past decade, and to cut budget deficits by $4.8 trillion over the next decade.
Biden and Democrats have demanded that Republicans pass a debt-limit increase without any conditions. Democrats initially had hoped to cut a deal with Senate Minority Leader Mitch McConnell (R-Ky.) to go around the House. But McConnell backs McCarthy and said Biden and McCarthy must work out a deal.
Democrats did not think McCarthy, who needed 15 rounds of votes to become Speaker, could produce a bill he could pass in his divided caucus. But he did.
Meanwhile, Wall Street experts and groups such as the Bipartisan Policy Center and the Committee for a Responsible Federal Budget, nonprofits that in the past urged quick approval of debt limit increases, are urging Biden to negotiate with House Republicans.
Biden, however, did not agree to open negotiations with Congress until last week, and only after Yellen warned the government would begin to run out of money in June.
What are the potential options to end the standoff?
That’s the big question before Biden’s White House meeting Tuesday with Schumer, McConnell, McCarthy and House Democratic Leader Hakeem Jeffries (D-Brooklyn).
Unless one side capitulates, any resolution likely will require compromise and votes from Democrats and Republicans in both the House and Senate.
Biden and Democrats have created some possible workarounds.
The White House, for example, is considering whether Biden could simply lift the debt limit based on the 14th Amendment language that the U.S. debt “shall not be questioned.”
And House Democrats have set in motion a rarely used discharge petition to force the House to take up a bill to raise the debt ceiling — although they would need five Republican votes to pass it, which is unlikely to happen.
Also, the moderate and bipartisan House Problem Solvers Caucus has proposed suspension of the debt ceiling until the end of the year to allow completion of a 2024 budget and creation of a fiscal commission to propose long-term solutions for the government debt.
Biden, who is scheduled to speak about the debt ceiling issue on Wednesday at Westchester Community College in Valhalla, has said he would negotiate with Republicans over federal spending measures separately from the debt limit.
McCarthy must tread carefully, given his party’s narrow majority of five votes that has empowered the conservative Freedom Caucus. Some caucus members have threatened to oust McCarthy as Speaker if he does not press for their deep cuts in spending.
Meanwhile, some in the White House and in Congress have begun talking about a short-term extension of the debt limit to allow more time to work out a deal, according to reports.
Going into the meeting Tuesday, both sides have hardened their positions.
Schumer on Friday doubled down on his rejection of any short-term debt-limit extension. Instead, he said, Congress should approve the motion he filed last Monday for a two-year suspension of the debt limit, until the end of 2024.
Over the weekend, Jeffries backed Schumer's position and Senate Republicans showed their support for McCarthy.
"I don't think the responsible thing to do is to kick the can down the road when President Biden has been saying, for months — the position of Leader Schumer, the position of House Democrats — has been we have to avoid a default," Jeffries said on NBC's Meet the Press Sunday.
Sen. Mike Lee (R-Utah) released a letter Saturday saying Republicans won't vote for a clean debt limit hike or to end a filibuster over such a hike. A total of 43 Republicans senators signed the letter, enough to sustain a filibuster against a clean debt limit increase.
“A lot is weighing on the meeting between the Big Four," on Tuesday, said G. William Hoagland, a senior vice president of the Bipartisan Policy Center.
“At least they're sitting down. And even though the president says [lifting the debt limit] is nonnegotiable, I think even the president at the end of the day will have to agree to have some form of a face-saving for McCarthy as well as for the administration,” he said.
“Any kind of any default,” Hoagland said, “is not going to work to the political benefit of either the president or Republicans.”