Debt ceiling: Here’s what you should know as threat of default looms

By Tami Luhby and Kaanita Iyer, CNN

The clock is ticking faster on the nation’s debt ceiling drama.

Just when the federal government will no longer be able to pay its bills in full and on time is not known, but it could come as soon as early June.

That wouldn’t give House Republicans and the White House a lot of time to work out a deal to avoid a default, especially since negotiations have been at a standstill for several months.

House Speaker Kevin McCarthy pushed his package to raise the debt ceiling by $1.5 trillion through the House in a close vote on Wednesday. But the White House continues to say that it will not negotiate on the issue.

The US hit its debt ceiling in January, triggering the Treasury Department to start taking extraordinary measures to prevent a default.

Here’s what the situation is all about.

What is the debt ceiling?

Established by Congress, the debt ceiling is the maximum amount the federal government is able to borrow to finance obligations that lawmakers and presidents have already approved — since the government runs budget deficits and the revenue it collects is not sufficient. Increasing the cap does not authorize new spending commitments.

The debt ceiling, which currently stands at $31.4 trillion, was created more than a century ago and has been modified more than 100 times since World War II.

Though it was originally designed to make it easier for the federal government to borrow, the limit has become a way for Congress to restrict the growth of borrowing — turning it into a political football in recent decades.

Still, fears of a default have prompted lawmakers to pass legislation to raise or suspend the ceiling every time, most recently in December 2021. So the US has never actually defaulted on its debt.

Why don’t we know when the US will default?

In letters to McCarthy in January, Treasury Secretary Janet Yellen wrote that she expects the cash on hand and extraordinary measures to last at least until early June, though she noted there is “considerable uncertainty” around that forecast.

Other groups have projected that the so-called X-date, when the US would default, will arrive over the summer or in the early fall.

The timing depends largely on how much revenue the federal government takes in, when extraordinary measures become available and when its obligations come due.

Treasury is getting a big influx of funds in April from tax collections, but receipts are running weaker than expected so far. That could mean that the default date could hit as soon as early June. A final tally should be ready in the next few weeks.

If the tax revenues are enough to sustain bill payments into June, then it’s unlikely the federal government will default until later in the summer. Treasury will get another injection of funds from second quarter estimated tax payments, which are due June 15, and from extraordinary measures that become available at the end of the month.

What happens if the US does default on its debt?

Once the extraordinary measures and cash on hand are exhausted, the debt ceiling crisis would start having very real impacts.

The Treasury Department would likely have to temporarily delay payments or default on some of its commitments, potentially affecting interest and principal payments on US debt, Social Security payments, veterans’ benefits and federal employees’ salaries, among other obligations.

But no one knows exactly how Treasury would handle the situation since it has never happened.

A default would also wreak havoc on the US economy and the global financial markets, as well as shake confidence in the safety of the Treasury market and raise borrowing costs. Even the threat of one in 2011 caused the only credit rating downgrade in the nation’s history.

What are extraordinary measures?

These moves are mainly behind-the-scenes accounting maneuvers. Treasury secretaries are authorized by Congress to take several types of extraordinary measures to prevent a default, giving lawmakers more time to increase or suspend the limit. Secretaries in both Democratic and Republican administrations have taken such steps.

This time, Yellen is selling existing investments and suspending reinvestments of the Civil Service Retirement and Disability Fund and the Postal Service Retiree Health Benefits Fund. Also, she is suspending the reinvestment of a government securities fund of the Federal Employees Retirement System Thrift Savings Plan.

These funds are invested in special-issue Treasury securities, which count against the debt limit. Yellen’s actions will reduce the amount of outstanding debt subject to the limit and temporarily provide the agency with additional capacity to continue financing the federal government’s operations.

This “debt issuance suspension period” will last through June 5, she wrote in a letter to McCarthy in January.

No retirees will be affected, and the funds will be made whole once the impasse ends.

Will Congress raise the debt ceiling?

Contention in the House speaker election earlier this year has raised concerns about whether McCarthy will be able to corral Republican hardliners — who see a potential default as a way to force the government to cut back spending — and negotiate a deal with Democrats, who oppose any reductions.

For now, he is using the debt ceiling crisis to push spending cuts and enact other longstanding Republican goals, such as work requirements in safety net programs. In January, McCarthy rejected Democratic calls for a clean debt ceiling increase without any conditions attached.

The White House has countered that it will not offer any concessions or negotiate on raising the debt ceiling.

How is the debt ceiling crisis different from a federal government shutdown?

While the two are often confused, a government shutdown happens when Congress doesn’t pass a federal funding bill, while a debt ceiling crisis would occur if lawmakers don’t approve legislation to lift the debt limit.

Federal agencies are required to stop nonessential functions and furlough nonessential employees if Congress doesn’t pass the annual appropriations bills that fund their operations, though what and who is deemed critical can change in each occurrence.

During a shutdown, passport operations may not be processed as quickly, visitor centers at national parks could be shuttered and fewer food and environmental safety inspections may occur, among other impacts.

However, essential workers, such as air traffic controllers and federal law enforcement, have to remain on the job, though they aren’t paid until the impasse is over.

The last partial shutdown, which lasted a record 35 days, occurred in December 2018 and January 2019.

A government shutdown is not a concern at the moment because Congress passed a $1.7 trillion federal spending bill in December. The legislation will fund federal operations until the end of the fiscal year on September 30.

In a debt ceiling crisis, the federal government would continue to operate, but the Treasury Department would not have enough money to pay all of the nation’s obligations in full and on time.

This story has been updated with additional developments.

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