What is the federal debt limit?
- The debt limit, or debt ceiling, is the maximum amount of money the federal government can borrow to pay its existing legal obligations.
- The federal government reached the debt limit on January 19, 2023, and the U.S. Department of the Treasury is currently using “extraordinary measures” to prevent a default in the near term.1
- The federal government will default on its debt obligations as soon as early summer of this year if Congress does not raise the debt limit.2
Facts about the debt limit:
- Raising the debt limit does not authorize new spending commitments. It simply allows the federal government to pay its existing obligations including: Social Security and Medicare benefits, military salaries, interest on the national debt, tax refunds, and other payments.3
- Congress has always reached an agreement to raise the debt limit before the deadline. Since 1960, Congress has increased the debt limit on 78 separate occasions, including 49 times under Republican presidents and 29 times under Democratic presidents.4
- The threat of a default alone is enough to create significant economic damage. The United States suffered a credit downgrade and financial market turmoil after a down-to-the-wire showdown in 2011.5
- A default is different from a government shutdown. While government shutdowns have occurred and are disruptive, a government default would likely carry more, and more severe, negative consequences.
- Congress has the authority and responsibility to lift the debt ceiling and safeguard the full faith and credit of the United States.
What are the consequences if Congress does not raise the debt ceiling and America defaults?
- A default, regardless of how long it lasts, could trigger a severe economic recession at a time when the country is already experiencing economic uncertainty.
- Millions of jobs would be lost.
- Interest rates for car loans, credit cards and mortgages would increase.
- Billions of dollars in pension plans and retirement accounts would be lost.
- Funding for vital veterans and military programs would be frozen, jeopardizing America’s national security.
- The U.S. Dollar’s central role in the global financial system would be threatened.
A Nationwide Economic Downturn:
- While much attention is paid to financial market impacts, the effects would be felt across the country and throughout the economy. Projections in a 2021 report released by Moody’s suggest that under a prolonged 4-month default, real GDP would fall by 4 percent, unemployment would rise to almost 9 percent, and the U.S. economy would lose nearly 6 million jobs.6
- For context, during the two years of the Great Recession, real GDP fell by 4.3 percent, unemployment rose to 10 percent, and the economy lost almost 9 million jobs.7
Retirement Savings are at Risk:
- The stock market was thrown into frenzy in the lead-up to and aftermath of the 2011 debt limit debate, with the Dow Jones Industrial Average plunging roughly 2,000 points from the final days of July through the first days of August. Indeed, the Dow recorded one of its worst single-day drops in history [at that time] on August 8, the day after the S&P downgrade, tumbling 635 points.
- Because a good deal of retirement savings is invested in stocks, lower stock prices reduce retirement security – from the second to the third quarter of 2011, retirement assets fell $800 billion.8
Higher Mortgage Interest Costs:
- In the late summer of 2011, the 30-year conventional fixed-rate mortgage spread jumped by as much as 70 basis points and the wider spreads lasted into 2012. For an average mortgage of $235,000 at that time, 70 basis points more on a mortgage rate would increase monthly payments by about $100 per month. With today’s home prices higher than in 2011, the costs would be even larger. Rates for auto loans, personal loans, and other consumer financial products would also be higher.9
Higher Borrowing Costs for Businesses of all Sizes:
- In 2011, corporate risk spreads on BBB-rated corporate debt jumped 56 basis points, and the wider spreads persisted into 2012. With Treasury yields rising this year, a widening in spreads would lead to an increase in yields on corporate debt. Higher funding costs lead to less spending on investment or other outlays that are financed. While corporate debt spreads are most applicable to borrowing costs for large institutions, in times of stress, banks tighten terms and standards on loans to small businesses, as well.10
- Small business confidence also fell during the 2011 standoff, likely weighing on small business’ willingness to hire and invest.
Higher Costs for Taxpayers:
- A default, or near-default, would push interest rates up for bonds issued by the U.S. Treasury. Such a rise in Treasury yields would also raise the cost of financing the government’s debt and worsen the fiscal position of the government—ultimately paid for by the U.S. taxpayer.
Disruption to Key Services:
- A default would risk the ability of the Federal government to provide key services and implement various programs, include Medicare, Social Security, agricultural programs, SNAP benefits, Child Tax Credit benefits, Housing assistance, Financial aid and the School Lunch Program.
Hurts Veterans and our Military, risking our national security:
- A default threatens veterans’ programs, with over 9 million veterans relying on physical and mental care, in addition to other support.
- The deployment of military personnel, the maintenance of equipment, the procurement of supplies, and other support activities would risk being frozen after a default, hampering the defense of the country at a time when there are ample threats to national security. The same holds for expenses related to counter-terrorism and intelligence measures, which could leave America more vulnerable to potential threats.
Hurts Veterans and our Military, risking our national security:
- A default threatens veterans’ programs, with over 9 million veterans relying on physical and mental care, in addition to other support.
- The deployment of military personnel, the maintenance of equipment, the procurement of supplies, and other support activities would risk being frozen after a default, hampering the defense of the country at a time when there are ample threats to national security. The same holds for expenses related to counter-terrorism and intelligence measures, which could leave America more vulnerable to potential threats.
Foreign Competitors, including China, would benefit:
- A loss of confidence in U.S. Treasuries could prompt foreign creditors to unload large portions of
their holdings and other U.S. dollar-denominated assets, harming the dollar’s standing in international markets. Persistent volatility or weakness of the dollar will add force to recent calls by several other countries, including China, for an end to the dollar’s status as the world’s reserve currency.
1Letter from Secretary Janet L. Yellen to Congress, U.S. Department of Treasury, January 19, 2023:
https://home.treasury.gov/system/files/136/Debt-Limit-Letter-to-Congress-20230119-McCarthy.pdf
https://home.treasury.gov/system/files/136/Debt-Limit-Letter-to-Congress-20230119-McCarthy.pdf
2“Treasury secretary warns US could default on its debt as soon as June,” CNN Politics, January 13, 2023, CNN,
https://www.cnn.com/2023/01/13/politics/debt-limit-janet-yellen-letter-to-kevin-mccarthy/index.html
https://www.cnn.com/2023/01/13/politics/debt-limit-janet-yellen-letter-to-kevin-mccarthy/index.html
3U.S. Department of Treasury: https://home.treasury.gov/policy-issues/financial-markets-financial-institutions- and-fiscal-service/debt-limit
4Id.
5“S&P downgrades U.S. credit rating,” CNNMoney, August 6, 2011, CNN, https://money.cnn.com/2011/08/05/news/economy/downgrade_rumors/index.htm
6“Playing a Dangerous Game with the Debt Limit,” Moody’s Analytics, September 21, 2021,
https://www.moodysanalytics.com/-/media/article/2022/playing-a-dangerous-game-with-the-debt-limit.pdf
https://www.moodysanalytics.com/-/media/article/2022/playing-a-dangerous-game-with-the-debt-limit.pdf
7“Great Recession,” Encyclopedia Britannica, https://www.britannica.com/topic/great-recession
8“The Potential Macroeconomic Effect of Debt Ceiling Brinksmanship,” U.S. Department of Treasury, October 2013, https://home.treasury.gov/system/files/276/POTENTIAL-MACROECONOMIC-IMPACT-OF-DEBT-CEILING- BRINKMANSHIP.pdf
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