WASHINGTON — Representative Kevin McCarthy of California finally secured the House speakership in a dramatic middle-of-the-night vote early Saturday, but the deal he struck to win over holdout Republicans also raised the risks of persistent political gridlock that could destabilize the American financial system.
Economists, Wall Street analysts and political observers are warning that the concessions he made to fiscal conservatives could make it very difficult for Mr. McCarthy to muster the votes to raise the debt limit. That could prevent Congress from doing the basic tasks of keeping the government open, paying the country’s bills and avoiding default on America’s trillions of dollars in debt.
The speakership battle suggests President Biden and Congress could be on track later this year for the most perilous debt-limit debate since 2011, when former President Barack Obama and a new Republican majority in the House nearly defaulted on the nation’s debt before cutting an 11th-hour deal.
“If everything we’re seeing is a symptom of a totally splintered House Republican conference that is going to be unable to come together with 218 votes on virtually any issue, it tells you that the odds of getting to the 11th hour or the last minute or whatever are very high,” Alec Phillips, the chief political economist for Goldman Sachs Research, said in an interview Friday.
Representative Kevin McCarthy won the speakership early Saturday only after making a deal with hard-right lawmakers.Credit…Kenny Holston/The New York Times
The federal government spends far more money each year than it receives in revenues, producing a budget deficit that is projected to average in excess of $1 trillion a year for the next decade. Those deficits will add to a national debt that topped $31 trillion last year.
Federal law puts a limit on how much the government can borrow. But it does not require the government to balance its budget. That means lawmakers must periodically pass laws to raise the borrowing limit to avoid a situation in which the government is unable to pay all of its bills, jeopardizing payments including military salaries, Social Security benefits and debts to holders of government bonds. Goldman Sachs researchers estimate Congress will likely need to raise the debt limit sometime around August to stave off such a scenario.
Understand the U.S. Debt Ceiling
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What is the debt ceiling? The debt ceiling, also called the debt limit,is a cap on the total amount of money that the federal government is authorized to borrow via U.S.Treasury securities, such as bills and savings bonds, to fulfill its financial obligations. Because the U.S. runs budget deficits, it must borrow huge sums of money to pay its bills.
When will the debt limit be breached? Congress passed legislation in December 2021 to raise the limit by $2.5 trillionand stave off the threat of default until 2023. Unless it is raised again, the statutory cap is expected to be reached at some point next year.
Why is there a limit on U.S. borrowing? According to the Constitution, Congress must authorize borrowing. The debt limit was instituted in the early 20th century so that the Treasury would not need to ask for permission each time it had to issue debt to pay bills.
What would happen if the debt limit was hit? Breaching the debt limit would lead to a first-ever default for the United States, creating financial chaosin the global economy. It would also force American officials to choose between continuing assistance like Social Security checks and paying interest on the country’s debt.
Raising the limit was once routine but has become increasingly difficult over the past few decades, with Republicans using the cap as a cudgel to force spending reductions. Their leverage stems from the potential damage to the economy if the limit is not increased. Lifting the debt limit does not authorize any new spending; it just allows the United States to finance existing obligations. If that cap is not lifted, the government would be unable to pay all of its bills, which include salaries for military members and Social Security payments.
The exception to the debt-limit drama was the four years of Donald J. Trump’s presidency, when Republicans largely abandoned their push to tie increases in the limit to cuts in federal spending. In 2021, Senate Republicans clashed with Mr. Biden as the deadline for raising the limit approached, but those lawmakers ultimately helped Democrats pass a law increasing the cap.
Some Democrats pushed to avoid this scenario last year, when it became clear that their party would likely lose at least one chamber of Congress. They hoped to raise the limit again in the lame-duck session of Congress after the November elections that delivered House control to Republicans, to avoid any chance of a default before the 2024 presidential election. But the effort never gained traction.
As a result, the next round of debt-limit brinkmanship could be the most fraught on record — as evidenced by the battle over the speakership. Conservative Republicans have already made clear that they would not pass a debt-limit increase without significant spending curbs, likely including cuts to both spending on the military and on domestic issues not related to national defense.
The drama in selecting a House speaker suggests that President Biden and Congress could be on track later this year for the most perilous debt-limit debate since 2011.Credit…Doug Mills/The New York Times
Their power stems from the fact that Republicans hold a more narrow majority than they did following the 2010 midterms, which empowered the conservative holdouts who opposed Mr. McCarthy. Among that group’s demands were a push for steep cuts in federal spending and a balancing of the federal budget within a decade without raising taxes.
Mr. McCarthy appeared to agree to those demands, pledging not to raise the debt limit without major spending reductions — including efforts to reduce spending on so-called mandatory programs, which include Social Security and Medicare — in a deal that brought many holdouts into his camp.
A speaker who violated that deal could risk being overthrown by the Republican caucus in the House. But Mr. Biden and his party’s leaders in the Democratic-controlled Senate have vowed to fight those cuts — particularly to social safety net programs. That could mean a prolonged standoff that goes on so long the government runs out of money to pay its bills.
Staunch budget hawks in Washington have long argued that the United States needs to stop spending — and borrowing — so much money and that nation cannot afford its long-term debt. They have pushed for a variety of ways to reduce the growth in long-term spending, including cuts to health care for the poor and for older Americans. And many have called for ending some tax breaks while ensuring that the wealthiest and corporations pay more.
Yet most of those fiscal hawks have called the Republican spending demands reckless and likely to produce stalemates on key fiscal issues.
“Their specific ask of balancing the budget in 10 years is just totally unrealistic. It would take $11 trillion in savings,” said Maya MacGuineas, president of the Committee for a Responsible Federal Budget in Washington, which has long pushed lawmakers to reduce future deficits through spending cuts and tax increases.
“I want to save more money than a lot of people,” Ms. MacGuineas said. “But what they’re demanding is just not achievable.”
Hurtling toward a deadline for raising the debt limit would sow chaos in financial markets, including for stocks and Treasury bonds, Mr. Phillips said. If Congress failed to raise the debt limit and the government became unable to borrow more money, Mr. Phillips said, America would suffer a sudden decrease in federal spending equivalent to as much as one-tenth of all daily economic activity.
“This does not feel like a false alarm,” he said.
In 2011, Republicans and Mr. Obama agreed on a deal to raise the debt limit that also imposed future limits on domestic spending increases. Ms. MacGuineas, Mr. Phillips and other analysts expressed skepticism that negotiations between Mr. Biden and House Republicans would do the same this time, in part because the faction that blocked Mr. McCarthy’s ascent this week appears unwilling to compromise for significantly more modest concessions from Democrats.
Administration officials have given no indication that they would negotiate with Republicans over a debt-limit increase at all — nor that they were preparing for the possibility of a House speaker refusing to put a debt-limit increase to a vote without steep spending cuts.
Karine Jean-Pierre, the White House press secretary, told reporters in a briefing on Friday that Mr. Biden expected Congress to raise the debt limit again with no strings attached.
“We have said that we should not be using the debt ceiling as a matter of political brinkmanship,” she said. “We’ve been very clear. If you look at what Republicans in Congress did three times — three times during the Trump administration — is that they were able to deal with it in a way that was responsible, right? They voted three times, again, to lift the debt ceiling. And so Congress must once again be responsible.”
Moderate lawmakers have already begun floating possibilities for how the House might raise the limit. One long-shot idea: a so-called discharge petition signed by a majority of the House to force a vote on a bill. Such a move would presumably rely almost entirely on Democratic votes with a few Republicans joining in. But that outcome is far from guaranteed; it would require extensive coordination by both sides and expose defecting Republicans to punishment and primary challenges.
Still, Representative Brian Fitzpatrick, Republican of Pennsylvania, embraced the possibility of such a compromise this week in an interview with CNN. “There is a number of options to circumvent leadership,” he said. “There is not a ton. But there are options at our disposal.”
FAQs
What is the current debt limit? ›
The amount is set by law and has been increased or suspended over the years to allow for the additional borrowing needed to finance the government's operations. On December 16, 2021, lawmakers raised the debt limit by $2.5 trillion to a total of $31.4 trillion.
What happens if the U.S. government defaults on debt? ›The U.S. defaulting on its debt would threaten the value of bonds, equities, and the U.S. dollar, which would unfurl in the global market already saddled with high inflation and interest, potential recession, and multiple geopolitical crises.
What is the 2023 deficit? ›In this report, the Congressional Budget Office describes its projections of the federal budget and the U.S. economy under current law for this year and the decade that follows. The deficit is projected to total $1.4 trillion in 2023; annual deficits average $2.0 trillion over the 2024–2033 period.
What is the House of Representatives debt ceiling? ›That's the legal amount of money the federal government can borrow. $31,381,000,000,000 is our current debt limit.
How much does the U.S. owe China? ›2021, China owns $1.095 trillion of the total $28 trillion U.S. national debt.
Who owns the most US debt? ›1. Japan. Japan held $1.08 trillion in Treasury securities as of November 2022, beating out China as the largest foreign holder of U.S. debt.3 The low and negative yield market in Japan makes holding U.S. debt attractive. Japan holds 14.87% of foreign-owned U.S. debt.
Can the US government ever pay off its debt? ›In modern history, the U.S. has never defaulted on its debt. The debt ceiling is the self-imposed limit on how much debt Congress allows the federal government to have. If Congress does not raise or suspend the debt ceiling, the U.S. could default on its debt, which would also impact financial markets and the economy.
Can the US get rid of its debt? ›Eliminating the U.S. government's debt is a Herculean task that could take decades. In addition to obvious steps, such as simply hiking taxes and slashing spending, the government could take a number of other approaches, some of them unorthodox and even controversial.
Can we ever pay off the US debt? ›Can the U.S. Pay Off its Debt? As budget deficits are one of the factors that contribute to the national debt, the U.S. can take measures to pay off its debt through budget surpluses.
How much is the US government in debt? ›At its peak in April 2022, the Fed held more than $6.25 trillion in U.S. government debt, more than double its holdings just before the pandemic hit the U.S. in March 2020.
What is the 2023 federal budget? ›
The Consolidated Appropriations Act, 2023 is a $1.7 trillion omnibus spending bill that was signed by President Joe Biden on December 29, 2022.
What will happen to the national debt in the future? ›At 79 percent of GDP, our federal debt is at its highest point since just after World War II. Unfortunately, the even more depressing fiscal fact is that our debt is projected to nearly triple over the next 30 years to more than twice the size of the U.S. economy. These levels have no precedent in American history.
How many times has Congress lifted the debt ceiling? ›Since 1960, Congress has acted 78 separate times to permanently raise, temporarily extend, or revise the definition of the debt limit – 49 times under Republican presidents and 29 times under Democratic presidents.
What is the debt ceiling crisis? ›A potential debt-ceiling crisis in the United States began unfolding on January 19, 2023, when the United States hit its debt ceiling. It is part of an ongoing political debate in the United States Congress about federal government spending and the national debt.
Who does the U.S. government borrow money from? ›The federal government borrows money from the public by issuing securities—bills, notes, and bonds—through the Treasury. Treasury securities are attractive to investors because they are: Backed by the full faith and credit of the United States government. Offered in a wide range of maturities.
Does United States owe China any money? ›How much money does the U.S. owe to China? China owns roughly $1.08 trillion worth of U.S. debt. 2 This amount is subject to market fluctuations. The value will change whenever China trades Treasury securities or when the prices of those bonds change.
Who does America owe money too? ›Many people believe that much of the U.S. national debt is owed to foreign countries like China and Japan, but the truth is that most of it is owed to Social Security and pension funds right here in the U.S. This means that U.S. citizens own most of the national debt.
How many countries owe the U.S. money? ›...
Debts and Debtors of the US Government.
| Country Name | Value of Holdings (Billions of $) |
|---|---|
| Cayman Islands | 263.5 |
| Brazil | 259.2 |
| Switzerland | 229.3 |
| Luxembourg | 223.4 |
United States. The United States boasts both the world's biggest national debt in terms of dollar amount and its largest economy, which resolves to a debt-to GDP ratio of approximately 128.13%.
Which country has highest debt? ›The U.S. has a problem with its debt, which has exceeded $31 trillion in 2022. This is compared to a GDP of $25.66 trillion, according to the Bureau of Economic Analysis.
Is China in a debt crisis? ›
The size of China's debt problem is truly staggering. At last measure, debt of all sorts – public and private and in all sectors of the economy — amounted to the equivalent of $51.9 trillion, almost three times the size of China's economy as measured by the country's gross domestic product.
Has the U.S. ever had no debt? ›As a result, the U.S. actually did become debt free, for the first and only time, at the beginning of 1835 and stayed that way until 1837. It remains the only time that a major country was without debt. Jackson and his followers believed that freedom from debt was the linchpin in establishing a free republic.
What happens if the U.S. can't pay its national debt? ›If the debt ceiling binds, and the U.S. Treasury does not have the ability to pay its obligations, the negative economic effects would quickly mount and risk triggering a deep recession. The economic effects of such an unprecedented event would surely be negative.
How much debt does the US owe to itself? ›Roughly $24.3 trillion of America's total public debt outstanding consists of debt held by the public, and $6.6 trillion is intragovernmental holdings, according to Monday data from the Treasury Department.
Why does the US owe so much debt? ›Since the government almost always spends more than it takes in via taxes and other revenue, the national debt continues to rise. To finance federal budget deficits, the U.S. government issues government bonds, known as Treasuries.
How will us pay its debt? ›To pay for this deficit, the federal government borrows money by selling marketable securities such as Treasury bonds, bills, notes, floating rate notes, and Treasury inflation-protected securities (TIPS).
What is the federal increase for 2023? ›As the new year begins, federal employees may be wondering how much extra money they'll see in their paychecks. President Biden made official a 4.6% average pay raise for civilian federal employees. Of that, 4.1% will go toward an across-the-board increase and the remainder will vary depending on where employees live.
Why is the government shutting down? ›In the United States, government shutdowns occur when there is a failure to enact funding legislation to finance the government for its next fiscal year or a temporary funding measure.
What is the budget for climate change 2023? ›The Governor's budget proposal would generate $5.5 billion in General Fund savings from climate, resources, and environmental programs in 2023‑24—$3.8 billion from spending reductions, $875 million from reducing General Fund and backfilling with a different fund source (primarily the Greenhouse Gas Reduction Fund, or ...
What happens if the US debt gets too high? ›But when the debt exceeds the tipping point, your standard of living could be impacted. Interest rates may increase and that could slow the economy. The stock market could react to a lack of investor confidence, which could mean lower returns on your investments. And a recession may even be possible.
What problem will the U.S. face in years to come due to the high debt? ›
High and rising deficits and debt can lead to persistently high inflation, rising interest rates, slower economic growth, increased interest payments, reduced fiscal space, greater geopolitical risk, and growing generational imbalances.
What will the US debt be in 2050? ›Summary: Under current law, we project that national debt will rise to 225% of GDP by 2050 and continue to rise thereafter. Changing demographics will reduce future economic growth.
Has the U.S. ever hit the debt ceiling? ›That month, Congress voted to increase it by $2.5 trillion, which President Biden signed into effect on December 16, 2021. At that point, it was set at about $31.4 trillion. On January 19, 2023, the United States again reached the debt ceiling.
What happens when a government defaults? ›The immediate impact of sovereign default to creditors is the loss of the principal amount loaned to the government and the interest owed on the debt. The state may resort to either partial cancellation or decide to restructure the debt to more favorable terms.
Has the U.S. ever hit the debt limit? ›That month, Congress voted to increase it by $2.5 trillion, which President Biden signed into effect on December 16, 2021. At that point, it was set at about $31.4 trillion. On January 19, 2023, the United States again reached the debt ceiling.
Could the U.S. ever get out of debt? ›In modern history, the U.S. has never defaulted on its debt. The debt ceiling is the self-imposed limit on how much debt Congress allows the federal government to have. If Congress does not raise or suspend the debt ceiling, the U.S. could default on its debt, which would also impact financial markets and the economy.
What is a high level of debt? ›Generally speaking, a debt-to-equity or debt-to-assets ratio below 1.0 would be seen as relatively safe, whereas ratios of 2.0 or higher would be considered risky. Some industries, such as banking, are known for having much higher debt-to-equity ratios than others.
What happens if the U.S. debt gets too big? ›But when the debt exceeds the tipping point, your standard of living could be impacted. Interest rates may increase and that could slow the economy. The stock market could react to a lack of investor confidence, which could mean lower returns on your investments. And a recession may even be possible.
What happens if the US can't pay its national debt? ›If the debt ceiling binds, and the U.S. Treasury does not have the ability to pay its obligations, the negative economic effects would quickly mount and risk triggering a deep recession. The economic effects of such an unprecedented event would surely be negative.
What country is in the most debt? ›Japan has the highest percentage of national debt in the world at 259.43% of its annual GDP.
Who does the US owe money? ›
That includes corporations, domestic individual investors, local or state governments, Federal Reserve banks, foreign investors, foreign governments and other entities. About a third of the debt held by the public is held by foreign holders.
What's the best debt to income? ›- 35% or less: Looking Good - Relative to your income, your debt is at a manageable level. You most likely have money left over for saving or spending after you've paid your bills. ...
- 36% to 49%: Opportunity to improve. ...
- 50% or more: Take Action - You may have limited funds to save or spend.
What do lenders consider a good debt-to-income ratio? A general rule of thumb is to keep your overall debt-to-income ratio at or below 43%.
Can debt make you rich? ›By and large, good debt is borrowing that helps you build long-term wealth. Bad debt, on the other hand, can harm your credit and deplete your finances. The difference comes down to two factors: risk and cost.