CNN
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President-elect Donald Trump had hoped to start 2025 without worrying about the debt ceiling, but that wish was not fulfilled.
Addressing the debt ceiling, which is reinstated on January 2nd, remains on Congressional Republicans’ list of New Year’s resolutions. The House last week fell far short of passing a two-year extension of the cap suspension as part of a Republican-led government spending bill. Congress ultimately passed a federal government funding package by mid-March that did not include President Trump’s demands to address the debt ceiling.
President Trump had hoped to act on the debt ceiling now so as not to affect the ambitious agenda he wants to pass through Congress next year. He also wanted President Joe Biden to show all his enthusiasm for the increase and to do so on “Biden’s watch,” a move that is unpopular with fiscal conservatives in President Trump’s party. It turned out that.
In a joint statement with Vice President-elect J.D. Vance last week, he said, “If Democrats won’t cooperate on the debt ceiling now, why would anyone think they will do so in June under our administration?” said.
Here’s what you need to know about debt ceiling reinstatement.
Once the debt ceiling is reinstated, the Treasury is expected to begin using a combination of cash on hand and so-called contingency measures to keep the federal government’s bills paid on time and in full. This is because the country spends more than it receives and must borrow money to make up the difference. However, once your debt reaches the limit, you can no longer do that.
Treasury Secretary Janet Yellen is expected to notify Congress soon that the debt ceiling has been reached and outline future steps. He is also likely to give lawmakers a prediction of when these efforts could run dry, potentially forcing the state to default on its obligations for the first time.
The last time the United States dealt with a debt ceiling crisis was in early 2023, when the debt ceiling reached $31.4 trillion. After months of contentious negotiations between the Republican-led House of Representatives and Democrats who control the Senate and White House, Congress passed the bipartisan Fiscal Responsibility Act in June 2023, with some Along with spending caps and cuts, the debt ceiling was suspended until January 1, 2025.
The unusual measures adopted by the Ministry of Finance are mainly behind-the-scenes accounting operations. In 2023, the Department sold existing investments and suspended reinvestments in the Civil Service Retirement and Disability Fund and the Postal Service Retirement Health Benefits Fund. It also stopped the Government Securities Investment Fund, part of the Federal Employees’ Retirement System, from fully investing in U.S. interest-bearing securities. Federal retirees and employees were not affected, and the funds were fully refunded once the impasse was resolved.
The debt ceiling currently stands at approximately $36.2 trillion.
Not much, at least while the Treasury has the resources to pay all the bills.
What would happen if a country actually defaulted on its debts is unknown because it has never actually happened before. The Treasury will have to decide which bills to pay based on the revenue it receives each day.
But if a default occurs, the potential consequences could include delays in Social Security benefits for tens of millions of beneficiaries who rely on monthly payments for much of their income. Additionally, more than 2 million federal civilian employees and about 1.4 million active-duty military personnel may not be paid on time, and federal contractors may also experience delayed payments.
A default could disrupt the economy and stock markets, prompting Treasury yields to rise and raising borrowing costs.
Additionally, if Congress reaches a last-minute deal, it could have a negative impact on the country’s credit rating. Fitch Ratings downgraded the U.S. credit rating following last year’s debt ceiling standoff. S&P took a similar action in 2011 after the debt ceiling dispute.
While S&P’s downgrade led to a significant decline in the stock market and an increase in bond yields, Fitch’s downgrade had little effect on the market. Moody’s is the only major credit rating agency to maintain a perfect AAA rating on U.S. Treasuries, but in January it warned that the U.S. was in danger of losing that badge of honor. suggests a relatively risk-free investment for buyers. Moody’s cited the rising costs of the country’s rapidly rising debt burden and political polarization, including a “resurgence of debt ceiling brinkmanship” as the main reasons for concern.
House Republican leaders last week floated a proposal to raise the debt ceiling by $1.5 trillion next year as part of a first-of-its-kind reconciliation package that would include border security, energy measures and more. The bill also includes a $2.5 trillion cut in net mandatory spending, aimed at satisfying conservative lawmakers who oppose raising the debt ceiling without cutting it.
Republicans are trying to use the reconciliation process to pass some of their top priorities, since they only need a simple majority vote in the Senate. The party is on track to win 53 seats in the Senate next year.
Using the reconciliation process would eliminate the need for Republicans to negotiate with Democrats who oppose deep spending cuts. But going down that path would go against a recent tradition of addressing the debt ceiling through bipartisan agreement, including during President Trump’s first term, said the executive director of the Bipartisan Policy Center’s Economic Policy Program. Shai Akabas told CNN.
But even if Republicans were to raise the debt ceiling by $1.5 trillion on their own, it wouldn’t buy the party much time, Akabas said. According to his behind-the-scenes calculations, the U.S. will hit the new cap late next year, with a potential default in early 2026.
It’s difficult to predict at this point, but many experts say the Treasury likely has enough resources to continue making payments until the middle of this year.
This would give lawmakers several months to decide how to deal with the debt ceiling.
CNN’s Annie Grayer contributed to this report.
