Debt Ceiling 2023: How Likely Is a Financial Crisis?

Since 1960, the debt ceiling has been raised 78 times under both Democratic and Republican administrations.

A partisan divide among the seats of power in the federal government has threatened Americans with yet another fiscal drama. Debt-limit-raising negotiations between Democratic President Joe Biden and the Republican-controlled House of Representatives appear to have stalled. Earlier this month, the debt ceiling was reached, leaving millions of Americans anxious about governmental entitlements and obligations.

What is the debt ceiling?

As the pseudo-piggy bank of the federal government, the U.S. Treasury is tasked with paying the bill for previously made policy. However, since 2001, the government has spent more than it has taken in, leaving the Treasury with no choice but to borrow the difference from domestic and foreign creditors.

Congress limits the amount of money the Treasury is allowed to borrow at any one time. The debt ceiling increased most recently in December 2021, when it was raised to $31.4 trillion. Effectively the United States' credit limit, the debt ceiling is set by politicians, not lenders.

As a necessary means of making up America's annual deficit, the debt ceiling is closely tied to the ability of the country to pay its legal and financial obligations. Although debt ceiling crises have happened before, Congressional leaders have historically never failed to raise the ceiling when necessary to avoid default. The failure of Congress to act would be unprecedented.

What could a debt crisis mean for Americans?

Hitting the debt ceiling doesn't mean the government immediately defaults on its debts. Instead, it means the Treasury will have to satisfy whatever obligations come due with whatever cash it has on hand for however long it can. This is the current state of the Treasury, as the debt ceiling was once again reached on Jan. 19. However, by instituting so-called "extraordinary measures," the Treasury projects it can continue satisfying its obligations until June.

What happens if negotiates remain stale come June? It depends on whom you ask. Some suggest that legislation could prioritize debt payments, avoiding the technical definition of a default. Others, including Treasury officials and economists do not believe that to be a viable option. The Treasury may fall back on a plan to pause all payments, hatched during the 2011 debt ceiling crisis.

It is important to note that a debt ceiling crisis has much different effects than a government shutdown. While a government shutdown may see dozens of agencies suspend operations and temporarily furlough millions of employees, a default caused by a debt crisis could have even wider effects.

The over 66 million Americans receiving Social Security benefits and over 61 million Americans receiving Medicare benefits could see their entitlements reduced or paused. Additionally, a default by the Treasury, or even the hint of a default, could shake the faith of investors the world over and put global markets in jeopardy.

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How likely is a debt crisis?

Debt ceiling increases must be approved by both the House of Representatives and the Senate. While the Democratic majority in the Senate is expected to vote in line to raise the ceiling, the Republican majority in the House is primed to negotiate for the passage of any legislation.

Republicans are calling for fiscal responsibility and a reduction in spending from President Biden and the White House, but the exact bargaining points of the Republican leadership are not yet clear. The Republican Study Committee, a group of 156 House Republicans, released a budget plan in June of last year calling to raise the age of Medicare and Social Security eligibility. Former President Trump has pushed back against the proposal, and Republican leadership remains uncommitted.

Republican Speaker of the House, Kevin McCarthy (R-CA) is expected to meet with President Biden on Wednesday to discuss the debt ceiling. While the future of the debt ceiling is as of now uncertain, the effects of a Treasury in default are predicted to be catastrophic and wide reaching.