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Debt ceiling explained: What to know

admin by admin
May 13, 2023
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Debt ceiling explained: What to know
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An upside-down image of the US Capitol reflected in a puddle on the East Front on Tuesday, May 9, 2023. (Tom Williams/CQ-Roll Call, Inc, Getty Images)

Tom Williams | Cq-roll Call Inc. | Getty Images

The White House and Republicans in Congress are at odds over the debt ceiling. Failure to do so could lead to the first default in U.S. history.Treasury Secretary Janet Yellen warned US may lack funds to pay its obligations June 1 at the earliest Unless Congress addresses this issue.

Neither side is likely to be upset, so here’s what you need to know about the situation.

What is the debt ceiling?

that is Maximum amount Congress allows the federal government to borrow to finance bills. Governments typically spend more money than they collect in taxes, so they have to borrow money to pay the costs. However, unlike credit cards, the debt ceiling does not pertain to new spending as the spending has already been approved by Congress.

This mechanism was created during the First World War. Efforts to simplify borrowing. Prior to 1917, Congress had to approve additional debt each time it passed a new appropriation bill. Until recently, this was a fairly routine process. Congress has removed the debt ceiling 78 times since 1960. Finally, the debt ceiling was raised by $2.5 trillion in December 2021, bringing the ceiling to $31.381 trillion.

If Congress does not agree to raise the debt ceiling, the government will run out of money to pay the bills and default. The Treasury Department has already begun taking extraordinary steps to keep the government funded, but Yellen said it expects to run out of money completely by early June.

What if the US defaults on its debt?

A sovereign debt default would wreak havoc on the economy and disrupt markets around the world.On by default government bond It could crash the U.S. economy.The last time Congressional Republicans threatened default was in 2011, when Standard & Poor’s Downgraded US credit rating From AAA to AA+ for the first time ever.

If the U.S. were to default on its debt, gross domestic product would drop by 4% and more than 7 million workers would lose their jobs, Moody’s Analytics said. recently projected. Data show that 2 million jobs will be lost even in the shortest period of default.

According to Fitch Ratings, in that scenario the U.S. Treasury rating would be classified as “restricted default,” giving the U.S. Treasury a D rating until the U.S. can borrow again. A default could add $750 billion to federal borrowing costs over the next decade, according to the Brookings Institution.

What’s more, a default would shake the U.S. position on the world stage. U.S. Director of National Intelligence Avril Haynes told the Senate Intelligence Committee last week: Russia and China will use that the United States may default on its debt; Haynes warned that both countries would try to highlight “the turmoil within the United States, the inability to function as a democracy.”

What about government programs?

Tens of billions of dollars in payments would be suspended if the U.S. defaulted. The Bipartisan Policy Center estimates $50 billion in Social Security benefits, $20 billion in payments to Medicaid providers, $12 billion in veterans benefits, $6 billion in federal payroll, and $1 billion in SNAP benefits in the first half of June. is expected to be distributed.

In an interview with CNBC on Monday, Yellen demurred when asked how payments would be prioritized.

“There are no good options, all bad options,” Mr. Yellen said. “As any Treasury secretary knows, the only way to keep our economy and financial system in really good shape is to raise the debt ceiling and make it clear that Congress supports it. I really don’t want to discuss or rank these things.” The basic principle is that America pays the bills. ”

What is the Republican Party’s position?

Republicans worry about rising national debt, which has grown from less than $1 trillion in the 1980s to more than $30 trillion today. They refuse to raise the debt ceiling unless combined with spending cuts.

House Republicans passed the Limit, Conserve, and Grow Act last month, which outlines areas they want to cut. The bill would raise the debt ceiling for about a year, in exchange for drastic cuts in federal discretionary spending, imposition of new labor requirements for welfare recipients, and increased mining and fossil fuel production. ing.

What is the position of the White House?

The White House has maintained that it is Congress’ responsibility to raise the debt ceiling unconditionally, as it has done three times under Trump. President Joe Biden has repeatedly called on House Republicans to pass the debt ceiling hike in full and discuss budget spending cuts separately.

The president urged lawmakers to: “Normal discussion” Instead of an ultimatum.

“As I’ve been saying all along, where to cut and how much to spend, how to overhaul the tax system that ultimately everyone has to pay their fair share, or the tax threat We can debate whether to continue with business as usual without being exposed,” Biden said on Friday. “Let’s remove the threat of default. Let’s have a normal discussion. That’s why we’re openly discussing the budget process and making it available for everyone to see.”

what’s next?

Both party leaders need to continue talks to reach a compromise by the scheduled June 1 deadline. Otherwise, the Treasury Department would have to start deciding which bills to prioritize before the funds were completely depleted, which Yellen argues she can’t support.

Tags: AmericaBreaking News: MarketBusiness newsceilingdebtEconomic eventexplainedgovernment and politicsJanet YellenMarketpoliticsUS economy
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