The Debt Ceiling: What It Is, The Ramifications, and Why We Think It Will Be Raised
You’ve probably been hearing numerous news stories about the debt ceiling deadlock, perhaps leaving you concerned about the effects of this standoff. This article explores what the debt ceiling is, the ramifications of default, and why we believe the issue will be resolved.
What Is the Debt Ceiling?
The debt ceiling is a legislatively mandated limit on the amount of money the U.S. federal government can borrow to fulfill its financial obligations. Established by Congress during World War I, the debt ceiling sets a cap on the Treasury Department’s ability to issue bonds for borrowing.
Currently, the debt ceiling stands at $31.4 trillion, a limit that has already been reached. Treasury Secretary Janet Yellen has warned that a default could occur as early as June 1 if Congress fails to act. Unless raised, the government will not be able to borrow money to pay for its existing obligations.
Has the Debt Ceiling Been Lifted Before?
Yes, the debt ceiling has been raised numerous times in the past. Since 1960, Congress has increased the ceiling 49 times under Republican presidents and 29 times under Democratic presidents. The last increase occurred in 2021, setting the current limit at $31.4 trillion.
What Are the Biggest Budget Expenses?
As NPR reports, mandatory spending on programs like Social Security and Medicare comprises 63% of the total budget. Discretionary spending, including defense, accounts for approximately 30%. Interest on the national debt is a significant contributor, with rates recently rising from a record low of 1.6% in 2021 to around 6% now.
Why Is There an Impasse?
The Republican majority in the House views the debt ceiling as an opportunity to negotiate spending cuts. However, it’s important to remember that raising the debt ceiling pays for only those expenses already approved by Congress.
What’s At Stake?
A default on the government’s $31.5 trillion debt could have severe consequences. NPR writes:
“An actual default would be much worse, most economists agree. Not only would the U.S. likely be downgraded, but government workers and Social Security recipients — among many others — would go unpaid. Financial markets could be severely hit. For businesses and average Americans, it could become difficult to borrow money. Without access to credit, a recession would be all but certain, many economists agree.
“The global status of the U.S. dollar as a reserve currency and of U.S. Treasury bonds as a ‘safe haven’ investment might also be challenged.”[1]
A look at history shows the potential effects. In 2011, a default was narrowly avoided—but not before the stock market plummeted and the U.S. had its credit rating downgraded.
Why We Think the Debt Limit Will Be Raised
Despite the impasse, we believe the debt ceiling will be raised, albeit potentially at the last minute. The consequences of not raising the limit would be too detrimental to the American public and U.S. and global economies. It is unlikely that politicians who hope to be re-elected would risk such severe repercussions.
Final Thoughts
Our fiduciary financial planning firm focuses on long-term strategies to help clients navigate short-term political and economic events like the debt ceiling standoff. If you have concerns or questions, please schedule a complimentary call to discuss how we can help you feel more confident about your financial plan.
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This material was generated using artificial intelligence (ChatGPT) and edited by Kaleido Inc. from information derived from sources believed to be accurate. This information should not be construed as investment, tax, or legal advice.
[1] Scott Neuman, Ashley Ahn, and Scott Horsley, “The Fight Over the Debt Ceiling Could Sink the Economy. This Is How We Got Here,” NPR, updated 2 May 2023.
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