Over the past 30 years, the United States has faced four separate debt ceiling crises – in 1995, 2011, 2013, and 2018. The overall trend? Discussions about the Federal Government’s ability to go into new debt are now a permanent feature of our political system. Crisis situations are growing increasingly frequent, and each time, the markets hold their breath to see how they will resolve.
But what is the current debt ceiling crisis all about? What is at stake on each side? Here are five things you should know about them.
What is the debt ceiling crisis?
The “debt ceiling” is the legal limit that determines how much debt the Federal Government (and specifically, the Treasury) can hold at a time.
The easiest way to explain it would be to compare it to the nation’s credit card limit: as long as we stay within that limit, the Treasure can manage its own debt largely independently. However, once we “max out” that amount, it needs approval from Congress to raise it.
A debt ceiling crisis occurs when the nation approaches this limit, and Congress doesn’t step in to approve a raise. The Federal Government is running at a near-constant deficit, so without further debt, it may find itself unable to pay for its expenses.
How Long Do We Have to Fix It?
According to Treasury Secretary Janet Yellen, if the debt ceiling is not raised before June 1st, 2023, the nation will start to default on some of its due payments.
This deadline is particularly tight, as both House and Senate have relatively few working days throughout May 2023. The House will recess for the first week in May, while the Senate will have a 10-day holiday starting May 18th.
As a result, President Biden has called for an emergency meeting on May 9th. This is immediately after the House returns, and should kick start the process to reach an agreement before the Senate leaves. In this meeting, Biden will meet with the party leaders from both House and Senate.
How Can We Fix It?
In short, both chambers of Congress need to approve raising the debt ceiling before the June 1st deadline. This requires a simple majority in the House, where Republicans have a slight majority.
However, in the Senate, they need at least 60 votes. Here, the Democrats have a very slight majority, but that alone won’t be enough to pass the bill.
Why is an Agreement Still Pending?
Most economists agree that raising the debt ceiling is necessary. However, each party has differing opinions regarding the conditions under which the bill should pass.
For most House and Senate Democrats, the debt ceiling should be raised with no preconditions: it is a matter of national urgency, not a time to seek political favor. They want a “clean” bill that deals with the problem directly and nothing else.
Many Republicans oppose this, as they see the debt ceiling crisis as a symptom of a deeper problem. Therefore, they want the bill to include specific steps that will help curb Federal spending, and at least delay the need for the next increase.
What Happens if There’s No Agreement?
If the debt ceiling is not raised before June 1st, the government won’t have enough money to cover its expenses.
This will mean:
It may need to shut down some of its non-essential offices and programs, sending thousands of workers home.
It may miss some of its upcoming debt payments, which would deeply damage its credit rating and international standing.
McCarthy’s position as House Speaker will likely be questioned, which will allow his opponents to oust him.
The overall political atmosphere will further deteriorate ahead of the upcoming election year.
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