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. In response, U.S. treasury secretary Janet Yellen began enacting temporary "extraordinary measures". On May 1, 2023, Yellen warned these measures could be exhausted as early as June 1, 2023; this date was later pushed to June 5.

The debt ceiling had been increased multiple times through December 2021 since the 2013 debt-ceiling standoff, each time without budgetary preconditions attached. In the 2023 impasse, Republicans proposed cutting spending back to 2022 levels as a precondition to raising the debt ceiling, while Democrats insisted on a "clean bill" without preconditions, as had been the case in raising the ceiling 3 times during the first Donald Trump administration.

If the government had run out of funds, the Treasury would have had to either default on payments to bondholders or immediately curtail payment of funds owed to various companies and individuals that had been mandated but not fully funded by Congress. Both situations had been expected to result in a global economic meltdown. Additionally, if the federal government had been unable to issue new debt, it would have had to balance its budget by imposing budget cuts that, in total, would have equaled 5% of the size of the American economy. Constitutional scholar Laurence Tribe said that a default would be unconstitutional due to the 14th Amendment and the government would be required to repay its debts despite hitting the debt ceiling. President Joe Biden said that he was considering invoking the 14th Amendment because he felt he had authority to do so, but questioned whether it could be done in time to avoid default given the possibility that it might be appealed.

On May 27, Biden and then-House speaker Kevin McCarthy struck a deal to increase the debt-ceiling but cap federal spending; the resulting bill, the Fiscal Responsibility Act of 2023, passed the House on May 31 and the Senate on June 1. Biden signed it into law on June 3, bringing the crisis to an end.

Background The deficit and the national debt

Federal budget and deficit

In 2019, just over 60% of the federal budget went to mandatory spending for programs like Social Security, Medicare, and Medicaid, with another 30% going to discretionary spending (half of which went to defense). The remaining 9% went to pay for interest on the debt. Meanwhile, both mandatory spending programs and interest on the debt were expected to take up increasing shares of the federal budget, while tax revenues were expected to be stagnant.

In the fiscal year 2022, the federal government brought in $4.90 trillion but spent $6.27 trillion, with a net budget deficit of $1.38 trillion (the fourth-highest of the 21st century). In addition, it has run deficits every year since 2001, when it last ran a surplus. Financing a deficit requires that the government borrow money.

However, based on Article 1, Section 8, Clause 2 of the United States Constitution, only Congress has the authority to borrow money "on the Credit of the United States".

Debt ceiling

The United States debt ceiling is a legislative limit that determines how much debt the Treasury Department may incur. It was introduced in 1917, when Congress voted to give Treasury the right to issue bonds for financing America participating in World War I, rather than issuing them for individual projects, as had been the case in the past. In 1939, Congress gave the treasury the right to issue and manage debt—though it limited how much it could issue. From 1939 to 2018, the treasury increased the debt ceiling 98 times, decreasing it five times. Whilst the treasury can borrow money to pay for federal expenditures, it is limited in power by Congress.

In other words, the treasury can borrow money to pay for federal expenditures—but only as much as Congress lets it.

National debt

Since 2009, America's national debt has nearly tripled, with annual federal deficits averaging close to $1 trillion since 2001. During the 21st century, it has gone up for various reasons, including tax cuts under presidents Bush and Trump, wars in Iraq and Afghanistan, entitlements like Medicare Part D, and spending in response to the Great Recession and the COVID-19 pandemic. Currently, the U.S. is the industrialized country with the fourth highest debt-to-GDP ratio, behind Japan, Italy and Greece. Additionally, the national debt is forecast to be double the United States' GDP by 2051.

Reducing the deficit and debt According to both policy experts and politicians, dealing with the deficit and debt will ultimately involve both raising taxes and decreasing spending. Past plans for taxes hikes have included reducing the number of deductions, increasing rates on higher earners, and making new taxes, while proposals for reducing spending have included reducing Social Security benefits, lowering payments for Medicaid and Medicare, and cutting defense spending, among others.

However, it tends to be difficult to do so in practice, owing to citizens' reluctance to alter large programs like Social Security or the raising of taxes. Historically, no political party has been willing to reduce the deficit or debt when they have held power, although the issue is often a foundation of candidates' election campaigns.

The U.S. dollar and borrowing The United States dollar (used heavily in international trade) is considered to be the world's reserve currency for a variety of reasons including the sheer magnitude of the American economy, America's geopolitical strength, the dollar's relative stability, and the market for U.S. debt.

As well, the Compromise of 1790 (when Treasury Secretary Alexander Hamilton got both Secretary of State Thomas Jefferson and Representative James Madison to agree to take on Revolutionary War debts assumed by the states and the Continental Congress in exchange for locating the capital on the Potomac River by Virginia) played a role with this: Because Revolutionary War bondholders were paid 100 cents on the dollar, America made good on its debt and established good credit. This, in turn, helped contribute to the dollar becoming the world's reserve currency.

As a result, foreign creditors (including China, Japan, and the United Kingdom) are large markets for the currency. This makes it easier for the U.S. government to finance the national debt via being charged lower interest rates for borrowing money.

Reactions Congress and the president The House of Representatives and the White House disagreed on how to resolve this crisis. Former House speaker Kevin McCarthy (R-CA) called for negotiations to reduce federal spending in exchange for increasing the debt ceiling, including making possible cuts to Medicare, Medicaid, and Social Security, or otherwise possibly overhauling entitlements. In contrast, the Biden administration declared that raising the debt ceiling is non-negotiable, and that Congress is obligated to increase it. Senate minority leader Mitch McConnell (R-KY) had said that there will be no default, though he also said that dealing with the debt ceiling would be up to President Biden and Speaker McCarthy.

As well, members of the House Freedom Caucus (and a few other Republicans who were not part of it, such as Representative Matt Gaetz) had raised a significant portion of funding for their 2022 election campaigns from small donors, which made it easier for them to resist pressure from business groups to raise the debt ceiling. Indeed, the debt ceiling fight was viewed by some as being an example of widening divisions between corporate America and the Republican Party, which had begun during the Trump presidency. On May 5, 2023, the president's senior advisor, Mitch Landrieu, appeared on TV to field questions on the White House response to the debt-ceiling crisis and the banking crisis.Ana Cabrera. (5 May 2023). "WH senior Advisor on Banking Chaos: 'There's a little bit of turmoil but it's about how you manage it'"MSNBC website Retrieved 12 May 2023. A week later, Landrieu held a press conference at the White House to underscore the serious threat to the national economy of the 'manufactured crisis' of the debt-ceiling standoff.Jennifer Jacobs. (12 May 2023). "Biden Czar Warns Default Would Halt Key Infrastructure Projects". BNN Bloomberg website Retrieved 23 May 2023.The White House. (12 May 2023). "White House Daily Briefing: Infrastructure Coordinator Warns of Negative Impact of Debt Limit Default".C-Span website

Treasury Department

Secretary Yellen's comments Treasury Secretary Janet Yellen told the Associated Press that, while she expected that Congress would eventually raise the debt ceiling, demanding spending cuts in exchange for doing so would be irresponsible and that increasing it was about ensuring that the federal government could pay for spending that Congress had already approved, rather than about new spending. Yellen made similar points in her January 13, 2023, letter to Congress, also warning that if they did not suspend or raise it, they would harm the American economy, the American people, and the global financial system's stability.

"Extraordinary measures" As a result of reaching the debt ceiling, the Treasury Department began considering implementation of "extraordinary measures" to prevent a default for a few months, so as to give Congress time to increase the debt ceiling, explained in a memo it issued on January 19, 2023. However, it would only be able to use them for a few months. Extraordinary measures are accounting maneuvers that the Treasury uses to enable the federal government to continue to meet its various financial obligations while there is an impasse over the debt ceiling. Said measures were first used by it in 1985, and Congress granted the Treasury permission to continue using them the following year.

Secretary Yellen also initiated a "debt issuance suspension period" through June 5, and has rejected the minting of a trillion-dollar coin (which would have created $1 trillion in seigniorage).

Markets Analysts were monitoring the ongoing debate over raising the debt ceiling, and were keeping investors informed of it and similarly warning about the potential consequences of a default. However, as of January 23, 2023, markets were not reacting to the debt ceiling debate, as the expectation was that the debt ceiling would be raised in time to prevent default. Analysts wrote that, with the exception of the 2011 debt ceiling crisis, markets had historically not reacted to debates over raising it. On the other hand, they wrote that if the debt ceiling wasn't increased as the deadline for doing so drew nearer, stock prices would start dropping and interest rates would begin to rise.

On May 5, 2023, European credit rating agency Scope placed the United States' AA sovereign rating under review for downgrade.

Responses and analysis

Comparisons to the 2011 debt ceiling crisis

The Associated Press has noted similarities between the 2023 debt ceiling crisis and the one in 2011, including how both involved the GOP-controlled House of Representatives demanding spending cuts in exchange for increasing the debt limit.

In 2011, both the House and the Obama administration negotiated for months on it until talks collapsed. As a result, markets experienced turmoil, with the S&P 500 dropping by over 16% in the final month before the deadline. In August 2011, two days before the government would have defaulted, there was a compromise between Democrats and Senate Republicans to create a committee to look into cutting spending, and to also increase the debt ceiling. As a result of the near-default, America's credit rating was downgraded to AA+ by Standard and Poor's, as American borrowing costs went up by $1.3 billion that year.