The Clock is Ticking to Raise The Debt Ceiling Once Again And Why Should Americans Worry

Congress faces a looming deadline to raise the debt ceiling and prevent a default on the national debt

Congress must reach a deal to raise the federal borrowing limit, or debt ceiling, before the government runs out of money to pay its bills by mid-October. The House passed a measure keeping the government funded until early December and suspending its borrowing limit through 2022, but the bill faces an uphill battle in the Senate.

The debt ceiling came out of the need to accrue more debt during the world wars of the 20th century, prior to which Congress had to specifically approve borrowing for each purpose. Since then, the limit has been raised or modified 98 times, according to the Congressional Research Service. Despite partisan disagreements, Congress and the president have never allowed the U.S. to default on its debt.

The U.S. routinely spends more money than it collects in revenue. These shortfalls are called deficits.

To cover these deficits the Treasury Department borrows money by issuing new debt in the form of government securities.

This debt is like a loan: Investors trade cash for a promise that the government will pay them back with interest. That loan is added to the total national debt.

Congress has imposed a limit on the amount that the Treasury can borrow, known as the debt ceiling. When lawmakers authorize new spending, the ceiling isn’t automatically increased.

Raising the debt limit doesn’t authorize new spending, but it allows the Treasury to issue new debt to cover spending that Congress has already authorized, like the $900 billion pandemic relief bill signed into law by former President Trump.

Once the debt ceiling is reached, new debt cannot be issued until lawmakers vote to raise or suspend the borrowing limit.

While the Treasury has some cash reserves, those will eventually run out, making it unable to pay the government’s bills on time.

Approaching the deadline without a plan can have consequences. In 2011, Standard & Poors reduced the United States’ credit rating from triple-A to double-A when Congress came close to not extending the ceiling.

This lowered credit rating increased the Treasury’s borrowing costs about $1.3 billion in the fiscal year, according to the Government Accountability Office.

If the government runs out of cash, it could begin to miss payments on its existing obligations, such as monthly Social Security and veterans benefits, or paychecks to federal employees and members of the military.

Goldman Sachs estimated the Treasury may need to halt more than 40% of payments, including some to U.S. households, if the ceiling is not raised or suspended.

A default would cause major disruptions for individuals and businesses, whose loan rates are linked to yields on Treasury securities.

To prevent this, the Treasury is using extraordinary measures to bolster its cash reserves—for example, suspending investments in federal employee pension plans. But most of those measures have been exhausted.

If Congress doesn’t act, Treasury Secretary Janet Yellen has said the government may run out of money by October, potentially roiling financial markets and raising borrowing costs.