Explainer: What you need to know about the debt ceiling

Politics

WASHINGTON (NewsNation) — You’re probably seeing scary headlines about the U.S. potentially reaching its “debt ceiling” and the likely economic fallout that would ensue if that were to happen.

But what exactly does that mean?

Here’s what you need to know.

What is a debt ceiling?

A debt ceiling is basically the nation’s credit card limit. If you have a credit card, you know that getting close to your limit or exceeding your limit means you’ve spent more money than you have.

The U.S. reached its more than $31 trillion annual borrowing limit on Jan. 19. U.S Treasury Department Secretary Janet Yellen warned congress that the department would have to begin taking “extraordinary measures” to stave off a default.

Yellen warned money will officially run out this summer.

What would raising the debt ceiling do?

Just like with a credit card, you can ask for an increase in your spending limit. This is what Congress is set to battle over: Raising the nation’s borrowing limit, or ceiling.

The new GOP House majority is demanding major spending cuts in exchange for any increase to the debt ceiling. That, however, is made trickier with a Senate that is still held by Democrats, who will likely refuse these cuts.

Regardless of party majority, trillions are added to the federal debt ceiling each year. About $4.7 trillion was added during former President Donald Trump’s first three years in office. It has added $4.8 trillion during President Joe Biden’s time in office.

What happens if the U.S. does default on its debt?

The Treasury Department would have to either default on payments to bondholders or restrict payment of funds due. Both situations would likely lead to a significant international financial crisis.

Some estimate that if the U.S. defaults this summer, the country wouldn’t be able to pay more than 60% of its bills.

Things like Social Security, tax refunds, Supplemental Nutrition Assistance Program (SNAP) benefits (commonly known as “food stamps”) and salaries for federal workers would be in jeopardy.

The U.S. came close to this reality in 2011, before a deal to raise the debt ceiling was finalized just two days before the money ran out.

Even though a deal was struck, it still caused the most volatile week for financial markets since the 2008 financial crisis and led to the U.S. credit ranking being downgraded for the first time in history.

So what are we doing now to prevent this?

Let’s go back to those “extraordinary measures” Yellen warned could follow.

For now, her measures include halting pension fund contributions and prematurely redeeming treasury bonds.

Congress, however, will need to act soon to avoid a fiscal crisis amid an already fragile U.S. economy.

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