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

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

President Joe Biden and House Speaker Kevin McCarthy are scheduled to meet for the first time on Wednesday to discuss possible solutions to the crisis before it becomes a full-blown crisis later this year.

Both sides live far away from each other. House Republicans continue to demand that the borrowing limit be lifted as well as spending cuts. The White House has said it will not negotiate or offer concessions and has pressed McCarthy to show the president his budget.

The US hit its debt ceiling last month, prompting the Treasury Department to take extraordinary steps to prevent a default.

Although Treasury Secretary Janet Yellen does not expect the US to default on its debt before early June, Congress will have to get serious about negotiating a solution, which is not expected to be easy.

Here’s what the situation is.

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 a budget deficit. And the revenue it collects is not enough. Cap increases do not allow for new spending commitments.

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

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

Still, fears of a default have prompted lawmakers to introduce legislation to extend or suspend the limit each time, most recently in December 2021.

In letters to McCarthy in January, Yellen wrote that she expected the extraordinary measures to continue into early June, though she noted that there was “considerable uncertainty” surrounding that forecast.

Once these measures and cash are exhausted, the real effects of the debt ceiling crisis will begin to take hold.

If the government is unable to borrow more, it will not have enough money to pay all its bills in full and on time – including interest on the national debt. So it would likely have to delay payments or default on some of its commitments, which would likely affect Social Security payments, veterans’ benefits and federal employee salaries.

But no one knows how the Treasury will handle the situation because it never happened.

A default would wreak havoc on the US economy and global financial markets, as well as raise the cost of borrowing. Even a threat of one in 2011 led to the country’s only credit rating downgrade in history.

These movements are essentially behind-the-scenes accounting tricks. Treasury secretaries are authorized by Congress to take a variety of extraordinary actions to prevent a default, giving lawmakers more time to raise or suspend the limit. Secretaries of 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 reinvestment of the Federal Employees Retirement System Thrift Savings Plan’s government securities fund.

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

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

No retirees will be affected, and the funds will be fully funded once the moratorium is over.

The recent dispute over the choice of House Speaker has raised concerns about whether McCarthy will be able to fend off Republican hardliners – who see a potential default as a way to force the government to cut spending – and Negotiate a deal with Democrats, who oppose any cuts.

For now, he’s leaning toward using the debt ceiling crisis to cut spending and balance the U.S. budget. In January, McCarthy rejected Democratic calls to raise the debt ceiling with no strings attached.

The White House has responded that it will not make concessions or negotiate on raising the debt ceiling. The president intends to remind McCarthy of his “constitutional responsibility to prevent a national default.”

Meanwhile, House Republicans are developing contingency plans that would tell the Treasury Department which payments should be prioritized if lawmakers can’t agree to fix the debt ceiling.

While the two are often confused, a government shutdown occurs when Congress fails to pass a federal funding bill, while the debt ceiling occurs if lawmakers do not approve legislation to raise the debt ceiling. A crisis will arise.

Congress passed a $1.7 trillion federal spending bill in December, averting a government shutdown that could have shut down nonessential jobs and left many federal employees without pay. The law would fund government operations through the end of the fiscal year on September 30.

This story has been updated with additional developments.

Read full article here

Related Articles

Latest Posts