It was Janet Yellen who sounded the alarm and set the ultimatum: According to the United States Treasury Secretary, if the American public debt ceiling is not raised by June 1, the country could be in default of payment. What happens if Uncle Sam no longer pays his bills? Our explanations.
This is the limit, voted by US parliamentarians, to the amount that the executive is authorized to borrow. It is currently set at 31,400 billion dollars (29,135 billion euros). The country reached this threshold in January and has only paid its bills since then thanks to emergency measures.
The birth of the debt ceiling dates back to the First World War, when the United States wanted to facilitate the war effort by allowing the Treasury to borrow without each time asking for authorization from Congress, the traditional master of public finances. : this then only stated the limit not to be exceeded. Since 1960, Congress has raised that cap 78 times, according to the Treasury.
No. These two mechanisms are not mechanically linked, even if negotiations on the debt ceiling often prepare the annual budget debate. As the Brookings Institution, a reference think tank in economic studies, points out, raising the debt ceiling is used to pay for expenses already incurred, while the threat of "shutdown" - or "closure" of the administration government − is linked to the legislative discussion of future spending: it therefore comes up every year in the fall, when the government submits a draft budget to Congress.
Parliamentarians must then validate a dozen finance laws corresponding to the main ministries. If either is not voted on, the executive cannot commit the corresponding expenditures and the public agencies concerned have no choice but to cease their "non-essential" activities as long as the parliamentarians do not haven't found a compromise. The main consequence is that many civil servants no longer go to work and that certain public services no longer work.
The United States has seen shutdowns before, including in 2013, when dissension over Obamacare — America's "universal welfare" — caused a 16-day shutdown, and in 2018 when lawmakers slammed into the wall "antimigrants" that Donald Trump wanted to build on the Mexican border (thirty-five days of closure).
On paper, the shutdown is less serious than the default of payment, because the "closure" can only concern the 25% of public funds subject to the annual finance laws, from which are excluded in particular social allowances. Nor does it prohibit the Treasury from continuing to pay the interest on its loans. In contrast, "a failure to raise the debt ceiling threatens not just annual spending subject to appropriations laws, but all federal spending, including interest on the debt, Social Security, Medicare, and other public benefits,” warns the Brookings Institution.
The situation would be comparable to that of a bankrupt company: not only can it no longer function, but it risks dragging its customers, service providers and creditors down with it. This unprecedented situation would have potentially catastrophic consequences for the American and even global economy. The United States may no longer be able to repay holders of US Treasuries, the preferred investment of global finance; the government would no longer be able to pay certain salaries of civil servants or the pensions of veterans.
Simply leaving doubt about the ability to repay hurts the economy. During the previous debt ceiling crisis in 2011, the threat of bankruptcy was enough to cause the United States to lose its precious triple A, the best credit rating assigned by the rating agencies. Less confident in the country's ability to repay, the markets made it pay more for its loans: that year, the time spent agreeing to raise the debt ceiling cost $1.3 billion to the taxpayer, according to the US Government Accountability Office, the equivalent of the Court of Auditors.
In 2023 too, concrete effects are already being felt. The price of credit default swaps, a form of insurance against US payment default, has already more than doubled compared to 2011. And Janet Yellen pointed out that investors are "more reluctant to hold sovereign debt which expires in June."
The treasury secretary said a default would destroy jobs and businesses and leave behind millions of families who depend on federal government subsidies. Deleterious effects, she said, would affect the most essential sectors, such as "air control and the work of law enforcement, border security, national defense and food security".
“America has never defaulted on its debts and it never will,” assured Joe Biden. For history to prove him right, a political agreement still has to be reached. However, the Republicans, in the majority in the House of Representatives since the midterm elections of November 2022, do not intend to deprive themselves of an opportunity to put pressure on the Democratic president. They thus demand, to give the green light to an increase in the debt ceiling, to bring public spending back to its 2022 level.
The Biden administration refuses: it proposes to keep public spending at its 2023 level, and to raise taxes for the wealthy and corporations. Joe Biden has warned he would refuse a deal "that protects billions in subsidies for big oil while endangering the health care of 21 million Americans, or that protects wealthy tax cheats while endangering food aid for one million Americans.
The tenant of the White House and the leader of the Republicans in the House of Representatives, Kevin McCarthy, discussed the subject on Monday, May 22, without sealing a compromise. Always anxious to reassure, the president assured after the meeting that the two parties agree on one point: the hypothesis of a default of payment "is not really on the table".
Some Democrats point out that, according to the 14th Amendment of the Constitution, “the validity of the public debt (…) cannot be questioned”. According to them, defaulting on the US debt is unconstitutional. Therefore, nothing can authorize it, not even disagreement in Congress. According to this analysis, Joe Biden has the power to unilaterally raise the debt ceiling, regardless of what Republicans think. At a press conference on the sidelines of the G7 on Sunday in Japan, the president did not rule out this option but said he doubted that it could be implemented by June 1.
A final solution is making headlines, consisting of issuing a trillion dollar coin to give it to the Treasury and give it some air without raising the debt ceiling. This track is far-fetched only in appearance: it had agitated Washington during the previous crisis of the ceiling, in 2011, before being officially dismissed by the Federal Reserve and the Treasury, as told by the Wall Street Journal. Janet Yellen brushed off the hypothesis again for this year. Moreover, as Jason Furman, former economic adviser to Barack Obama and professor of economics at Harvard, explained, this explicit attempt to circumvent the law would have every chance of being censured by the courts.
