Democrats and Republicans are locked in a high-stakes battle over the federal debt ceiling, with the U.S on track to default as soon as next month.
GOP senators say they won’t take any action to keep the U.S. solvent, insisting that Democrats must do so on their own. But President Biden and congressional Democrats are dialing up the pressure, hoping they’ll blink and help the U.S. pay off debts the country has accumulated over the years under both Democratic and Republican administrations.
Here are the five big questions defining the fight over the country’s fiscal future.
What is the debt limit?
The debt limit — often called the debt ceiling — is the legal cap on how much money the federal government can owe to the many individuals, businesses, financial institutions and foreign nations holding the country’s debt via U.S. Treasury bonds. It also includes money the federal government has borrowed from other federal accounts.
The Treasury Department issues bonds to fund spending approved by the president and Congress beyond what is covered by federal revenue. Once the U.S. reaches the debt limit, the Treasury is no longer authorized to issue new bonds and must take “extraordinary measures” until the president signs a bill either raising or suspending the debt limit.
While lawmakers in both parties have used debt limit expirations as leverage to reduce federal spending, it was not specifically created for that purpose.
Before the debt limit, Congress had to approve and structure every new issuance of Treasury bonds. When that became untenable during World War I, lawmakers passed the Second Liberty Bond Act of 1917 — a law that gave the Treasury greater control over the bond issuance process but with an overall cap of $11.5 billion.
“With World War I and the dramatic increase in government spending, they realized they couldn’t do this anymore. It just wasn’t practical,” said Christopher Russo, a research fellow with George Mason University’s Mercatus Center, a libertarian-leaning think tank.
“It’s people at Treasury who have a better understanding of the best way to be financing the government’s obligations, not people currently sitting in Congress,” he added.
The cap on bond issuance imposed through the 1917 law was eventually consolidated into a single federal debt limit that Congress increased nearly 100 times before the most recent suspension in 2019.
Why are lawmakers fighting over it now?
The debt limit of $28.5 trillion was reimposed Aug. 1 when a two-year suspension included in a 2019 budget deal signed by former President Trump expired.
Treasury Secretary Janet Yellen has warned lawmakers that the department next month may run out of ways to stave off a default.
Raising or suspending the debt limit has no direct impact on the size of the national debt, nor does it allow for or restrict any future federal spending. Lifting the debt limit only gives the federal government the ability to pay expenses previously authorized by presidents and Congress.
“The fact that they’re running into the debt limit now is not because of current spending proposals,” Russo said. “It’s all the spending that’s been authorized up until this point.”
Even so, the looming default has triggered a game of chicken and finger-pointing between Democrats and Republicans, both of whom are responsible for the unprecedented run-up of the national debt.
Republicans insist Democrats bear sole responsibility for raising the debt ceiling after passing a $1.9 trillion stimulus bill along party lines in March. Democrats are also racing to pass a multitrillion-dollar infrastructure, climate and social services bill by the end of the month.
“The Democrats have the capacity to raise the debt limit on their own, which is exactly what they should do. They’re spending well above our revenues, and they should associate the debt limit with their own spending,” Sen. Mitt Romney (R-Utah) said on Tuesday.
Democrats counter that Senate Minority Leader Mitch McConnell (Ky.) and his fellow Republicans must also be involved in raising the debt ceiling after doing so several times without any debt reduction and passing a $1.9 trillion tax cut bill with only Republican votes in 2017 under Trump.
“Leader McConnell, as I said, is playing dangerous political games by not stepping up to the plate as he asked us to do and we did when Trump was president,” Senate Majority Leader Charles Schumer (D-N.Y.) said Tuesday.
How are Democrats planning to raise it?
Biden and congressional Democrats are hoping to use the pressure of a potential financial crisis to push Republicans into voting for a debt ceiling hike. Republicans backed down from similar threats in 2011, when they controlled the House and Democrats controlled the Senate under former President Obama, but not before the U.S. suffered its first credit downgrade.
House Democrats will vote on a debt ceiling hike in the coming week, said Majority Leader Steny Hoyer (D-Md.) in a Friday letter to his caucus. He also said the House will vote on a continuing resolution (CR) to fund the government past Sept. 30. But he did not specify whether Democrats would combine the two measures into one vote to increase pressure on Senate Republicans, even though they’ve explicitly refused to vote for any bill with a debt ceiling hike.
While a debt ceiling hike should clear the House without much trouble, Democrats would need at least 10 GOP votes in the Senate to advance it to a final vote if a Republican decides to filibuster.
Republican senators have strongly implied that they would filibuster a debt ceiling hike, but a spokesman for McConnell did not respond to emailed questions on Friday about how far the conference would go to stop one.
If Republicans block a debt limit increase from reaching Biden’s desk, Democrats could include one in a budget reconciliation bill, which needs only simple majorities in both chambers.
But Democratic leaders have refused to do so, and it’s not clear if the sweeping spending proposal they plan to advance through budget reconciliation will be done before the U.S. enters default territory.
What happens if the U.S. defaults?
The U.S. has never defaulted on its debt, but experts say doing so could spark an economic catastrophe on a global scale.
“A default would have devastating effects on U.S. and global economies and the public. It would immediately and significantly decrease demand for Treasury securities and increase costs,” said the Government Accountability Office, the federal government’s independent audit firm, in an analysis this past week.
“We have reported numerous times that the full faith and credit of the United States must be preserved,” it added.
The White House warned Friday that a default would leave the federal government unable to run dozens of essential programs, likely plunging the economy into another recession that could not be buffeted by stimulus or emergency relief.
“The U.S. economy has just begun to recover from the pandemic and a manufactured debt ceiling crisis would threaten the gains we’ve made and the future recovery. If the U.S. defaults on its obligations, the ripple effects will hurt cities and states across the country,” the White House said in a Friday memo obtained by The Hill.
“If the U.S. defaults on its debt — cities and states could experience a double-whammy: falling revenues and no federal aid as long as Congress refuses to raise or suspend the debt limit,” the White House wrote.
A default could also upend the global financial system, which relies heavily on the easy flow of Treasury bonds across borders.
Businesses and foreign nations frequently use the U.S. dollar for international transactions and hold trillions in Treasury bonds as safe assets, with demand often rising in times of economic distress.
“The U.S. is seen as a reliable debtor in the world,” said Kathy Jones, chief fixed income strategist at Charles Schwab. “When you look at the number of transactions that take place, either in the financial markets or in goods and services, the vast majority are still done in U.S. dollars, particularly in the financial market, because the full faith and credit of the U.S. is important.”
If Congress allows the U.S. to default, it could cause a severe decline in the value of Treasury bonds that in turn could trigger dysfunction across the financial system.
“I don’t think anyone doubts that we have the ability to pay our bills. It’s the willingness to pay them,” Jones said. “Raising the debt ceiling is just an indication that, yes, of course, we’re willing to pay our bills. We’re not going to default.”
Will lawmakers be able to avoid a disaster?
While there is no clear path to a deal yet, analysts and veterans of past debt ceiling showdowns largely expect the White House and Congress to avert a default given the high stakes of failure.
“The day-to-day headlines about debt ceiling brinkmanship misses the forest for the trees in that the debt ceiling will be raised,” wrote Ben Koltun, research director at Beacon Policy Advisors, a Washington research consultancy.
“At this time, we don’t have a firm conviction on how it will ultimately happen but we nevertheless have strong conviction that it ultimately will happen based on one of the following scenarios,” he continued, laying out four paths to avert a default: Republicans caving on a CR-debt ceiling combination, GOP senators deciding not to block a standalone debt ceiling hike, Democrats including a hike in their reconciliation bill or unprecedented executive action.
“We don’t know which fail safes will work and which will fail, but we see something working out, even if it’s not pretty,” Koltun wrote.