What is the US debt ceiling and what will happen if it is not raised?
Joe Biden has cancelled a planned visit to Australia and Papua New Guinea to focus on debt limit talks, as the US faces a potentially catastrophic default if no agreement is reached by 1 June.
Biden’s decision came after warnings of an “unprecedented economic and financial storm”, from the treasury secretary, Janet Yellen, and yet another meeting with Republican counterparts to find a deal over the US debt ceiling.
Time is quickly running out to find a solution. Without raising the debt limit, the US government will default on its bills, a historic first, with likely catastrophic consequences. Federal workers would be furloughed, global stock markets would crash and the US economy would probably drop into a recession.
As talks enter crunch time, here is a quick guide on the debt ceiling and what it means for the US government and people across the country:
What is the debt ceiling?
The debt ceiling is the limit on the amount of money the US government can borrow to pay for services, such as social security, Medicare and the military.
Each year, the government takes in revenue from taxes and other streams, such as customs duties, but ultimately spends more than it takes in. This leaves the government with a deficit, which has ranged from $400bn to $3tn each year over the last decade. The deficit left at the end of the year ultimately gets tacked on to the country’s total debt.
To borrow money, the US treasury issues securities, like US government bonds, that it will eventually pay back with interest. Once the US government hits its debt limit, the treasury cannot issue more securities, essentially stopping a key flow of money into the federal government.
Congress is in charge of setting the debt limit, which currently stands at $31.4tn. The debt ceiling has been raised 78 times since 1960, under both Democrat and Republican presidents. At times, the ceiling was briefly suspended and then reinstated at a higher limit, essentially a retroactive raising of the debt ceiling.
What happens if the US defaults?
The US has never defaulted on its payments before, so exactly what will happen is unclear. It’s not likely to be good.
“Failure to meet the government’s obligation would cause irreparable harm to the US economy, the livelihoods of all Americans and global financial stability,” the US treasury secretary, Janet Yellen, said in a letter to Congress in January.
Investors would lose faith in the US dollar, causing the economy to weaken quickly. Job cuts would be imminent, and the US federal government would not have the means to continue all its services. Mortgage rates would probably soar – tanking the housing market.
Why is the US debt so high?
The US debt grows when the government is spending more money or when its revenue is lower.
Throughout its history, the US has had at least some amount of debt. But