US has hit the debt ceiling – here’s what that means

The United States hit its debt limit on Thursday, which triggered the US Treasury Department to take “extraordinary measures” to ensure that the country could fulfill its debt obligations.

Treasury Secretary Janet Yellen sent a letter to House Speaker Kevin McCarthy on Thursday warning that her department would begin taking “extraordinary measures”. She told Mr McCarthy that the US will be “unable” to fully invest the portion of the Civil Service Retirement and Disability Fund that is not immediately required to pay beneficiaries.

She also told him that she would begin a “debt suspension period” starting on Sunday and continuing into 5 June 2023. The Treasury Department is likely to run out of such extraordinary measures this summer, setting off a fight between the White House and Mr McCarthy’s Republican conference on raising the debt limit.

“My predecessors have declared debt issuance suspension periods under similar circumstances,” she said. “With these determinations, the Treasury Department will suspend additional investments of amounts credited to, and redeem a portion of the investments held by, the CSRDF, as expressly authorized by law.”

The debt ceiling is subject to mulitple misunderstandings. Contrary to common belief, it does not authorise new spending. Rather, the debt ceiling is the amount of money that the US government is legally allowed to borrow to meet existing obligations for debts already incurred. This includes Social Security, Medicare, military pay, interest on the national debt and tax refunds, according to the US Treasury Department.

If Congress does not raise the debt limit, the country would default on its debt, which rattle the confidence markets have in the US and affect its credit rating. It could also potentially weaken the US dollar and send the country into an economic crisis.

Ms Yellen also added that the Treasury Department would also suspend investments credited to Postal Service Retiree Health Benefits Fund, which handles retirement savings for workers in the US Postal Service.

The secretary had sent a letter to Mr McCarthy last week warning about reaching the debt limit.

“As I stated in my January 13 letter, the period of time that extraordinary measures may last is subject to considerable uncertainty, including the challenges of forecasting the payments and receipts of the U.S. Government months into the future,” she said. “I respectfully urge Congress to act promptly to protect the full faith and credit of the United States.”

Ms Yellen’s letter comes as Mr McCarthy and Republicans took control of the House of Representatives earlier this month. As part of the deals that Mr McCarthy cut with conservative members of his conference to obtain the gavel after a marathon 15 votes, he agreed to numerous measures to repeal the “Gephardt rule,” which automatically sends a clean debt ceiling increase to the Senate as soon as the House adopts a budget resolution.

An increase in the debt limit does not authorise any new spending, but simply raises the credit threshold so that the United States does not default on paying its debts. But House Republicans want to see steep spending cuts in exchange for any type of debt limit increase, something that the White House has strongly opposed.

At the same time, Democrats control the majority in the Senate and would likely rebuff attempts for steep spending cuts, specifically when it comes to entitlement spending like Social Security or Medicare.

Debt limit increases have become increasingly politicised when Republicans control Congress and Democrats control the White House. During 2011, when Republicans won the House of Representatives, Republicans tried to pressure then-House Speaker John Boehner to extract spending cuts from former president Barack Obama, for whom Joe Biden served as vice president.

Those negotiations led to Congress trying and failing to negotiate spending cuts, which led to what was called sequestration, wherein spending cuts across the board happened for both defense and non-defense spending.

White House press secretary Karine Jean-Pierre emphasised in a briefing on Wednesday that Congress needed to pass legislation to raise the debt limit.

“There is no alternative to Congress responsibility here to address the debt ceiling,” she told reporters. “Treasury makes millions of payments each day. Their system is built to pay our country's bills on time. It's not set to make the United States delinquent by paying our bills.”