Confused about the loan limit? here’s what you need to know


An inverted image of the US Capitol is reflected in a puddle on the Eastern Front on Tuesday, May 9, 2023. (Tom Williams / CQ-Roll Call, Inc. via Getty Images)

Tom Williams | CQ-Roll Call, Inc. , Getty Images

Republicans in the White House and Congress are locked in a standoff over the debt ceiling. Failure to extend or suspend it could result in a US default for the first time. Treasury Secretary Janet Yellen has warned that the US may run out of money to pay its obligations as soon as june 1 If Congress does not pay attention to this issue.

With neither side likely to budge, here’s what you need to know about the situation.

What is the loan limit?

it is maximum amount Congress allows the federal government to borrow to cover its bills. Because the government usually spends more money than it collects in taxes, it must borrow to pay for its expenses. Unlike credit cards, however, the spending was already approved by Congress, so the debt limit is not related to new spending.

The system was made during the First World War efforts to simplify credit, Prior to 1917, Congress was required to approve additional debt for each new spending measure passed. Until recently, this has been a routine process. Congress has raised the debt limit 78 times since 1960. The debt ceiling was last raised by $2.5 trillion in December 2021, taking the limit to $31.381 trillion.

If Congress does not agree to raise the debt ceiling, the government will not have the money to pay its bills and will default on its debt. The Treasury Department has already begun taking extraordinary measures to keep funding the government, but Yellen said she expects the funding to run out completely in early June.

What happens if America defaults?

Defaulting on sovereign debt would wreak havoc on the economy and markets around the world. on a default Treasury bonds Could put the US economy in jeopardy. The last time Congressional Republicans threatened default in Standard & Poor’s was in 2011. US credit rating downgraded First time from AAA to AA+.

If the US were to default, GDP would fall by 4% and more than 7 million workers would lose their jobs, Moody’s Analytics recently estimated, According to statistics, even a brief lapse will result in loss of 20 lakh jobs.

In that scenario, US bond ratings would be classified as “prohibited default” according to Fitch Ratings, and Treasuries would have a D rating until the US could once again borrow. The Brookings Institution noted that a default could result in $750 billion in higher federal borrowing costs over the next decade.

What’s more, a default would shake America’s standing on the world stage. US Director of National Intelligence Avril Haines told the Senate Intelligence Committee last week that Russia and China will take advantage The US is potentially defaulting on its debt. Haines warned that both nations would “attempt to unleash anarchy within the United States of America, that we are not capable of functioning as a democracy.”

What about government programs?

If the US were to default, it would mean a moratorium on payments of tens of billions of dollars. The Bipartisan Policy Center estimates that in the first half of June, $50 billion in Social Security benefits, $20 billion in Medicaid provider payments, $12 billion in veterans benefits, $6 billion in federal wages and $1 billion in SNAP benefits will be distributed .

In an interview with CNBC on Monday, Yellen dodged a question on how the payments would be prioritized.

Yellen said, “There is no good choice, every choice is a bad choice.” “I really don’t want to discuss and rank them because as every Treasury Secretary knows, the only option that really leaves our economy and our financial system in good shape is raising the debt ceiling.” And it’s making clear that Congress stands behind the core principle that America pays its bills.”

What is the Republican position?

Republicans are concerned about the rising national debt, which has grown from less than $1 trillion in the 1980s to more than $30 trillion today. They are refusing to lift the debt limit unless it is combined with spending cuts.

House Republicans passed the Limit, Save and Grow Act last month, outlining the areas they want to return. The bill would make sweeping cuts to federal discretionary spending, impose new work requirements for welfare recipients and expand mining and fossil fuel production, all in exchange for raising the debt ceiling for about a year.

What is the status of the White House?

The White House has been adamant that it is Congress’ responsibility to raise the debt ceiling without conditions, as it did three times under the Trump administration. President Joe Biden has repeatedly called on House Republicans to pass a clean debt ceiling increase and hold a separate conversation about spending cuts in the budget.

The President has appealed to the MPs to join it “common logic” instead of ultimatum.

“As I’ve said all along, we can debate where to cut, how much to spend, how to ultimately reform the tax system, where everyone gets their fair share or goes their own way.” To continue, but not under threat of default,” Biden said on Friday. “Let’s take away the risk of default. Let’s have a normal argument. That’s why we have a budget process to debate out in the open for all of you to see.”

What will happen next?

Leaders of both sides will have to continue discussions in order to reach an agreement before an estimated June 1 deadline. If they don’t, the Treasury will have to start making decisions about which bills to prioritize before they run out of money entirely, which Yellen called unsustainable.

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