What would happen if the United States does not pay its debt? How could it affect citizens?

Earlier this month, Treasury Secretary Janet Yellen notified Congress that the United States could default on its debt soon. Yellen stressed that it is impossible to predict with certainty the exact date the US will run out of cash but that Day X could be as soon as 1 June.

“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,” Yellen told lawmakers.

What is the debt ceiling?

The debt ceiling, or debt limit, places a maximum on the “total amount of money that the United States government is authorized to borrow to meet its existing legal obligations.” These obligations include Social Security and Medicare benefits, military salaries, tax refunds, and many other government-funded programs. By increasing the debt limit, Congress is effectively increasing the amount of money that the Treasury can borrow to pay its bills.

Some conflate the debt limit with additional spending. Speaker of the House, Kevin McCarthy, has said that increasing the debt limit is like increasing the credit limit on a teenager’s credit card. This is not the case. The debt ceiling ensures that the Treasury can pay its debts for spending that has already been approved by Congress. But the topic of the national debt should not be ignored. Still, the conversation requires a greater level of nuance for the public to understand the options political leaders have to reduce the deficit and the national debt in its entirety. For the GOP, the solution to the growing national debt is cutting government assistance programs. Democrats, some members of the party more than others, have said that instead of cutting spending, the deficit should be reduced by increasing taxes on corporations and the super-rich (which would exclude anyone making less than $400,000 a year).

What would happen if there was a debt default?

Congress must raise or suspend that debt ceiling to avoid dire economic consequences, such as spending cuts to key aspects of the welfare state.

The spending cuts would mean delays or a reduction in certain benefits provided by the government, such as Social Security, veteran pensions, and the salary of government workers, as well as effects on Medicare and Medicaid.

A partial government shutdown could be another consequence. This would result in a suspension of government functions in various areas of public administration.

If the debt ceiling is not raised and the government defaults, it will rely on incoming revenue to meet its obligations. Faced with this problem, the government could decide to increase taxes. President Biden has repeatedly proposed higher taxes for the wealthiest Americans.

The US credit rating would likely fall, increasing interest rates and making the country a riskier place to invest for foreign nations. Similarly, treasury yields would rise. Since interest rates on loans, credit cards, and mortgages are often based on these, the cost of borrowing money and paying off the debt would increase.

A debt default could trigger an economic recession, which could strip 800,000 workers from the economy, even if the default only occurs for a short period.

What has Congress done to prevent a default?

Despite the worsening situation, Congress has not reached an agreement on whether to raise or suspend the debt ceiling. Republicans propose to solve it by negotiating budget cuts. In late April, the Republican-controlled House of Representatives passed a bill to raise the debt limit called “Limit, Save, Grow” that dismantled many of the clean energy incentives included in the Inflation Reduction Act.

However, this bill is unlikely to pass the Senate as Democrats have made it clear they will not negotiate with spending cuts and expect Republicans to raise the debt ceiling.