US President Joe Biden will on May 16 discuss the debt ceiling with congressional leaders at the White House in a high-profile session. The president and Speaker Kevin McCarthy are trying to strike a budget deal before the US Treasury runs out of cash to keep paying the nation's bills, which could occur as early as June 1.

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As the meeting involving Senate Majority leader Chuck Schumer of New York, Senate Republican leader Mitch McConnell of Kentucky and House Democratic leader Hakeem Jeffries of New York, among others, is set to take place today, May 16, here’s is a look at what is the issue with US debt ceiling

What is the debt ceiling?

It is the maximum amount of money Congress allows the federal government to borrow to cover its bills. This is because the government generally spends more money than it collects in taxes, so it must take out debt to pay its expenses. Unlike a credit card, though, the expenses were already approved by Congress, so the debt ceiling does not pertain to new spending.

In order to simplify borrowing, this mechanism was created during World War I. Prior to 1917, Congress needed to approve additional debt for each new spending measure it passed.

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Congress has lifted the debt limit 78 times since 1960. The debt ceiling was last raised in December 2021 by $2.5 trillion, capping the limit at $31.381 trillion.

What is the current situation in the US?

If the debt ceiling limit is not raised or suspended, it could lead to the first-ever US default. Treasury Secretary Janet Yellen has warned that if the Congress doesn’t decide on the matter, the US may run out of money to pay its obligations as early as June 1.

This means if the debt ceiling is not lifted, Biden’s government will not have money to pay its bills and will default on its debt. The Treasury Department has already begun to take extraordinary measures to continue to fund the government, but Yellen said she expects funding to entirely deplete in early June.

What if the US defaults?

Yellen has repeatedly warned that failure by Congress to raise the $31.4-trillion federal debt limit could spark a "constitutional crisis" and would unleash an "economic and financial catastrophe" for the US and global economies.

"If Congress fails to increase the debt limit, it would cause severe hardship to American families, harm our global leadership position, and raise questions about our ability to defend our national security interests," she said.

If the US were to default, its gross domestic product would drop 4 percent and more than seven million workers would lose their jobs, Moody’s Analytics recently projected. Even a brief default would lead to the loss of two million jobs, according to the data.

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If that happens, Fitch Ratings has said US bond ratings would be classified as “restricted default,” and US treasuries would have a D rating unless the US could once again borrow. According to a CNBC US report, the Brookings Institution noted a default could lead to $750 billion in higher federal borrowing costs over the next decade.

This may also shake the US’ position on the world stage. Russia and China will take advantage of the US potentially defaulting on its debt, US Director of National Intelligence Avril Haines warned last week.

Joe Biden and McCarthy divided

Biden and top lawmakers agreed on last Tuesday (May 9) to further talks aimed at breaking a deadlock over raising the $31.4 trillion US debt limit.

Speaker McCarthy, meanwhile, emphasised a lack of progress after the meeting. "I didn't see any new movement," McCarthy told reporters, complaining that Biden didn't agree to talks until time was running out. "That's not a way to govern," he said.

Republicans led by McCarthy want Biden to accept their proposal to roll back spending, cap future outlays and make other policy changes in the package passed last month by House Republicans.

McCarthy says the House is the only chamber that has taken action to raise the debt ceiling. But the House Bill is almost certain to fail in the Senate, controlled by Democrats, and Biden has said he would veto it.

(With agency inputs)

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(Edited by : Shoma Bhattacharjee)

First Published:May 16, 2023 6:38 PM IST