December has been and will continue to be a busy month for Congress. Determining how they will decide to address the debt ceiling is one of the many issues facing lawmakers. While ensuring the United States does not default on its obligations for the first time in its history is crucially important for the economy, devoting precious time to addressing it will delay action in the Senate on the Build Back Better Act (BBBA) and its affordable housing, community development, and clean/renewable energy tax incentive and spending proposals.

The House passed legislation Dec. 7 that would limit Senate debate on a separate debt ceiling increase bill to 10 hours, creating a temporary rule in that chamber’s 60-vote legislative filibuster rules. The bill, which would also delay scheduled cuts in Medicare and other programs, passed on a 222-212 vote. The measure is expected to get a Senate vote this week, completing the first of two steps lawmakers have decided will be needed to pass a debt limit bill this time around.

Background

The debt ceiling is the limit at which the federal government can borrow money to fund its operations and it allows the government to fund its existing obligations, not create new ones. The debt ceiling was first instated in 1917 under the Second Liberty Bond Act of 1917 and the debt limit was set at $11.5 billion. Since 1960, the debt ceiling has been raised or suspended 78 times with mostly bipartisan support. When Congress passed the Budget Control Act of 2011, it raised the debt ceiling by $900 billion and allowed the president to raise it by as additional $1.2 trillion. Since February 2013, the debt ceiling has been suspended seven times.

After being suspended in August 2019 as authorized in the Bipartisan Budget Act of 2019, the debt ceiling was reinstated Aug. 1, 2021, at $28.4 trillion and raised to $28.9 trillion when President Biden signed legislation that raised it by $480 billion Oct. 14, 2021. The United States has never defaulted on its debt before. If the debt ceiling is not raised or suspended after the federal government borrowing reaches the limit, the United States would default for the first time ever and if the country defaults on its debt, there could be many negative ramifications.

Implications of Hitting the Debt Ceiling

If the federal government hits the debt ceiling, it cannot borrow any more funds and can only use its cash on hand and current revenues. The Department of the Treasury (Treasury) can take “extraordinary measures” to fund its current obligations, but these are temporary. One of these extraordinary measures include reducing the number of Treasury securities paid to certain government accounts. The federal government can also reduce the number of treasury securities by redeeming its current investments early or by temporarily halting new investments. These temporarily reduce the country’s debt, giving the government a little extra time to borrow while waiting for Congress to act. When the federal government uses all its extraordinary measures and cash, it can only rely on its current revenues to fund its obligations, but those revenues are not enough to meet these obligations.

Importance of Raising or Suspending the Debt Ceiling

The global financial market views U.S. debt as one of the safest assets in the world because Treasury securities are reliable and liquid. U.S. debt is priced based on its ability to pay instead of its willingness to pay, but if that reverses due to Congressional inaction on raising or suspending the debt ceiling, there will be long-term negative consequences.

Some of these potential negative ramifications of hitting the debt ceiling without Congressional action include:

• Social Security and other federal benefits not being paid to recipients as expected,
• The United States unemployment rate quickly rising by as much as 1.6%,
• The U.S. economy shrinking,
• Businesses not being able to access debt or financing at affordable rates,
• Significantly higher mortgage rates and interest payments on consumer loans,
• Global investors no longer being able to hold as many assets that are held in U.S. dollars due to the potential uncertainty of their security, and
• Some debt holders suing the U.S. government if the government were to default on their debt.

Treasury Analysis

Treasury Secretary Yellen has been urging Congress to raise or suspend the debt ceiling as soon as possible. She has warned Congress that the U.S. economy may quickly fall into a recession if the United States defaults on its obligations. If Treasury runs out of money due to congressional inaction on the debt ceiling, the government will not be able to make many of its payments, including Social Security payments, Child Tax Credit disbursements, military payments and small business federal loans. Yellen also predicts job loss as a result of inaction on the debt ceiling. She is predicting that the Treasury can continue to meet federal government obligations through Dec. 15 with a reasonable certainty if Congress does not take any action, and she is not confident that the department will be able to meet government obligations beyond this date. Yellen gave Dec. 15 as the day the debt ceiling must be raised by because the Treasury must transfer $118 billion to the Highway Trust Fund on that date as required by the recently enacted bipartisan Infrastructure Investment and Jobs Act. The potential negative ramifications can be avoided if Congress raises or suspends the debt ceiling before Dec. 15.

Next Steps

As mentioned above, the House passed legislation Dec. 7 to provide an expedited procedure to raise the debt ceiling in the Senate. With the support of Senate Minority Leader Mitch McConnell, R-Kentucky, the Senate is expected to consider legislation enabling the expedited procedure this week, which would then allow the House and Senate to consider the actual debt ceiling increase legislation containing a specific dollar increase next week. That legislation is expected to be enacted with only Democrats voting in favor.

The urgency of this raising or suspending the debt ceiling means that Congress, particularly the Senate, will be busy this month and will delay action on the BBBA. The BBBA is currently pending in the Senate after passing the House Nov. 19. The Senate must make sure it is in compliance with the Byrd rule before they can vote on it. The Byrd rule governs what can be done under the budget reconciliation process, and is adjudicated by the Senate Parliamentarian. The Parliamentarian is expected to complete her review of the legislation next week. If the Senate makes any changes to the BBBA as expected, it must go back to the House before it can be enacted.

If Congress can quickly address the debt ceiling, the Senate may be able to vote on the BBBA before Christmas. Senator Chuck Schumer, D-New York, originally wanted to consider the BBBA on the Senate floor sometime next week, but, given the need to address the debt ceiling first, it will more likely be the week of Dec. 20. However, these voting timeframes are not a guarantee and the debates over the debt ceiling may delay the debates over the BBBA, thus pushing back the BBBA’s vote in the Senate to after Christmas and possibly into 2022.