The potential economic consequences of different debt ceiling scenarios | KE | The White House (2023)

FAQs

What happens if the government hits its debt ceiling? ›

Potential repercussions of reaching the ceiling include a downgrade by credit rating agencies, increased borrowing costs for businesses and homeowners alike, and a dropoff in consumer confidence that could shock the United States' financial market and tip its economy—and the world's—into immediate recession.

The legal limit set by Congress on the total amount that the U.S. Treasury can borrow. If the level of federal debt hits the debt ceiling, the government cannot legally borrow additional funds until Congress raises the debt ceiling.

According to Moody's, even a short debt limit breach could lead to a decline in real GDP, nearly 2 million lost jobs, and an increase in the unemployment rate to nearly 5 percent from its current level of 3.5 percent.

The bill caps non-defense spending — which funds areas like public education and transportation — in fiscal 2024, then increases it by 1% in 2025. The deal suspends the debt limit of $31.4 trillion through Jan. 1, 2025.

The Federal Government Has Borrowed Trillions, But Who Owns All that Debt? At the end of 2022, the nation's gross debt had reached nearly $31.4 trillion. Of that amount, about $24.5 trillion, or 78 percent, was debt held by the public — representing cash borrowed from domestic and foreign investors.

On January 19, 2023, the United States hit its debt ceiling, leading to a debt-ceiling crisis, part of an ongoing political debate within Congress about federal government spending and the national debt that the U.S. government accrues.

This gap between income and spending is subsequently closed by government borrowing, increasing the national debt. An increase in the fiscal deficit, in theory, can boost a sluggish economy by giving more money to people who can then buy and invest more.

Meaning, there's only a certain amount of money the government can borrow before a limit, set by Congress, kicks in and the country can't take on anymore debt. In order to keep taking on debt, Congress will have to raise the limit.

The Treasury Department must find other ways to pay expenses when the debt ceiling is reached; otherwise, there is a risk that the U.S. will default on its debt. The debt ceiling has been raised or suspended several times to avoid the risk of default.

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. Fortunately, none of these consequences are inevitable.

What are the negative effects of debt? ›

There's a strong link between debt and poor mental health. People with debt are more likely to face common mental health issues, such as prolonged stress, depression, and anxiety. Debt can affect your physical well-being, too. This is especially true if the stigma of debt is keeping you from asking for help.

Fewer Economic Opportunities for Americans.

If high levels of debt crowd out private investments in capital goods, workers would have less to use in their jobs, which would translate to lower productivity and, therefore, lower wages.

The United States, holding the highest national debt globally, has a total of $31.68 trillion, representing a YoY increase of $1.3 trillion or 4.28%, reaching $30.38 trillion. Therefore, China's national debt has surged almost three times that of the United States in the past 12 months.

Over the past 20 years, Japan and China have owned more US Treasuries than any other foreign nation. Between 2000 and 2022, Japan grew from owning $534 billion to just over $1 trillion, while China's ownership grew from $101 billion to $855 billion.

If the United States defaults on its debt, it would undermine faith in the federal government's ability to pay all its bills on time, affecting the government's credit rating and unleashing massive turbulence in financial markets.

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.

And if a government default were to last much longer — well into the summer — the consequences would be far more dire, Zandi and his colleagues found in their analysis: U.S. economic growth would sink, 7.8 million American jobs would vanish, borrowing rates would jump, the unemployment rate would soar from the current ...

The national debt also impacts the economy because if it gets too high, consumer and business confidence in the economy may dwindle, which could lead to turmoil in the financial markets and higher interest rates.

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.

Who is affected by debt ceiling? ›

Veterans, seniors and government employees: These are just some of the people who stand to be impacted if Congress fails to raise the debt ceiling. Treasury Secretary Janet Yellen warns that without additional borrowing authority, the U.S. could run short of cash to pay its bills as early as June 1.

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.

The Fed tries to influence the supply of money in the economy to promote noninflationary growth. Unless there is an increase in economic activity commensurate with the amount of money that is created, printing money to pay off the debt would make inflation worse.

In 2011, the U.S. reached a crisis point of near default on public debt. The delay in raising the debt ceiling resulted in the first downgrade in the United States credit rating, a sharp drop in the stock market, and an increase in borrowing costs.

Consequences of National Debt

Rising debt imposes higher interest costs, especially when interest rates rise. The CBO expects the U.S. government's net interest costs to triple over the next decade, reaching $1.2 trillion annually by 2032.

In the event of a prolonged standoff, the government would be forced to slash spending by $350 billion, sending a “cataclysmic” ripple effect through the economy, and undermining the confidence of consumers, financial markets, and businesses alike, according to Zandi's analysis.

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.

And if a government default were to last much longer — well into the summer — the consequences would be far more dire, Zandi and his colleagues found in their analysis: US economic growth would sink, 7.8 million American jobs would vanish, borrowing rates would jump, the unemployment rate would soar from the current ...

Who does the US owe debt to? ›

The US government owes trillions of dollars in debt to foreign entities, including governments, central banks, companies, and individual investors. This debt includes US Treasury bonds and other securities, which are popular as they are considered safe investments.

The bottom line. Printing more money is a non-starter because it'd break our economy. “It would take care of the debt but at a price that's far too high to pay,” Snaith says.

'A person who is unable to pay his/her debt is called a 'bankrupt.

Notable recent events triggering large spikes in the debt include the Afghanistan and Iraq Wars, the 2008 Great Recession, and the COVID-19 pandemic.

Flashpoints that greatly contributed to the debt over the past 50 years include the wars in Iraq and Afghanistan, the 2008 financial crisis and the 2020 COVID-19 pandemic -- the latter two prompting sweeping stimulus measures from Congress that cost trillions of dollars.

At the end of FY 2023 federal debt is “guesstimated” to amount to $32.69 trillion. Thus far, on 2023-05-25, the federal debt is $31.47 trillion. See Coronavirus Update page. Click for federal debt from 1960 to present.

GDP would plunge 4.6%, costing 7.8 million jobs. Stock prices would collapse, wiping $10 trillion off household wealth, and borrowing costs would spike. A deep recession in the United States, caused by a prolonged breach or a US default, would sink the global economy too.

The Odds of US Going Past Default Date Are 25% and Rising, JPMorgan Says.

When the government spends more than it earns, it has a budget deficit and must issue debt in the form of Treasury securities. The U.S. has run a deficit for the last 20 years, substantially increasing the national debt. In fact, according to the Department of the Treasury, the current debt is $31.4 trillion.

Who owes the United States money? ›

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.

Japan - Debt: 221.32% of GDP

Japan's debt-to-GDP ratio is the highest in the world due to a prolonged period of economic stagnation and demographic challenges.