Republicans will still have to deal with the debt ceiling in 2025. Here’s what you need to know

By Tami Luhby, CNN

(CNN) — Although President-elect Donald Trump wanted to start 2025 without having to worry about the debt ceiling, he did not get his wish.

Addressing the debt ceiling, which will be reinstated on January 2, is still on the list of congressional Republicans’ New Year’s resolutions. The House last week fell far short of passing a two-year extension of the suspension of the limit as part of a GOP-led government spending bill. Congress ultimately passed a package to fund the federal government into mid-March that did not include Trump’s demand to deal with the debt ceiling.

Although the debt ceiling returns on January 2, the nation’s outstanding debt is set to decline slightly on that day so the new limit will be reached again later in the month, according to a letter Treasury Secretary Janet Yellen sent to congressional leaders on Friday afternoon.

Trump had hoped to address the debt ceiling now in part so it wouldn’t affect the ambitious agenda he wants to get through Congress next year. Also, he wanted it raised on “Biden’s watch,” so President Joe Biden would take any heat for the increase, a move that has proven unpopular with fiscal conservatives in Trump’s party.

“If Democrats won’t cooperate on the debt ceiling now, what makes anyone think they would do it in June during our administration?,” he said in a joint statement with Vice President-elect JD Vance last week.

Here’s what you need to know about the return of the debt ceiling:

What will happen on January 2?

The debt limit will be reinstated on January 2 at the amount of debt outstanding at the end of the previous day. But the debt level is also projected to dip by $54 billion on January 2 due to the scheduled redemption of certain securities.

So the nation isn’t expected to reach the reinstated limit until sometime between January 14 and January 23, Yellen wrote in her letter. At that time, it will be necessary for the Treasury Department to start taking so-called extraordinary measures to keep paying the federal government’s bills on time and in full. That’s because the nation spends more than it receives in revenue, and it has to borrow to cover the difference. But it can’t once it hits the debt limit.

When America reaches the debt ceiling, Yellen – or the acting agency leader if the limit is reached after Trump’s inauguration on January 20 – will inform Congress and outline how she will proceed. The letter also will likely provide lawmakers with an estimate of when these efforts could be exhausted, which could force the nation to default on its obligations for the first time.

The US last dealt with a debt ceiling crisis in early 2023, when it hit its $31.4 trillion debt limit. After months of contentious negotiations between the GOP-led House and the Democrats who controlled the Senate and White House, Congress passed the bipartisan Fiscal Responsibility Act in June 2023, suspending the debt limit through January 1, 2025 along with some spending caps and cuts.

The extraordinary measures that Treasury employs are mainly behind-the-scenes accounting maneuvers. In 2023, the department sold existing investments and suspended reinvestments of the Civil Service Retirement and Disability Fund and the Postal Service Retiree Health Benefits Fund. It also stopped fully investing the Government Securities Investment Fund of the Thrift Savings Fund, part of the Federal Employees’ Retirement System, in interest-bearing securities of the US. No federal retirees or employees were affected, and the funds were made whole once the impasse ended.

The debt ceiling currently stands at about $36.1 trillion.

What will the return of the debt ceiling mean for Americans?

Not much – at least while the Treasury Department has the resources to pay all the bills.

Just what would happen if the nation actually defaults on its debt is unknown because it’s never actually happened before. The Treasury Department would have to decide what bills to pay based on the revenue it receives daily.

However, if a default occurs, the potential fallout could include delayed Social Security benefits to tens of millions of recipients, many of whom depend on the monthly payments for much of their income. Also, more than 2 million federal civilian employees and roughly 1.4 million active-duty military members may not be paid on time, while federal contractors could also see a lag in payments.

A default could also roil the economy and stock markets and likely prompt yields on US Treasuries to rise, increasing borrowing costs.

Also, if Congress takes until the last minute to come to an agreement, it could hurt the nation’s credit ratings. Fitch Ratings downgraded its US credit rating in the wake of last year’s debt ceiling standoff. S&P did the same in 2011 after a debt ceiling battle.

Although the S&P downgrade led to steep stock market declines and rising bond yields, the Fitch downgrade had little impact on the markets. Moody’s is the sole major credit rating agency that maintains its perfect AAA rating on US debt, although it warned in January that America is in danger of losing that badge of honor, which signals relatively risk-free investing to purchasers of US Treasury bonds. Moody’s cited the increasing cost of the nation’s swiftly rising debt load and the political polarization – including “renewed debt limit brinkmanship” – as the main reasons for concern.

How do House Republicans want to address the debt ceiling?

GOP leaders in the House last week floated an idea to raise the debt limit by $1.5 trillion next year as part of a first reconciliation package, which may include border security and energy measures. The legislation would also include $2.5 trillion in cuts to net mandatory spending, aimed at satisfying conservative members who oppose increasing the debt ceiling without accompanying cuts.

The Republicans are looking to use the reconciliation process to pass some of their top priorities because they would only need a simple majority of votes in the Senate. The party will have 53 Senate seats next year.

If they use the reconciliation process, the Republicans wouldn’t need to negotiate with the Democrats, who would oppose major spending cuts. But taking that path would buck the tradition of recent years, when the debt ceiling has been addressed through bipartisan agreements, including during Trump’s first term, Shai Akabas, executive director of the Bipartisan Policy Center’s economic policy program, told CNN.

However, even if the GOP increases the debt limit by $1.5 trillion on its own, that would not buy the party much time, Akabas said. The US would hit the new ceiling in the second half of next year, with the potential of default coming in the first half of 2026, according to his back-of-the-envelope calculation.

How much time does Congress have to come up with a plan?

That’s hard to predict at this point, but many experts say it’s likely the Treasury Department will have enough resources to continue paying the bills until the middle of the year.

That will give lawmakers several months of breathing room to determine how to address the debt ceiling.

CNN’s Annie Grayer contributed to this report.

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