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What Happens If the Debt Ceiling Isn’t Raised?

January 21, 2023

3 min Read

Written by Vance Cariaga

Edited by Daria Uhlig

"The United States Capitol in Washington DC, USA.

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With the federal government due to hit its debt ceiling on Jan. 19, Americans face the prospect of having certain services either cut back or shut down altogether.

The reason is simple: When the government reaches the debt ceiling, it can no longer borrow money to pay its bills, meaning it would have to cut spending elsewhere. This could take many forms, including suspending certain pension payments, withholding or reducing the pay of federal workers and military personnel or delaying interest payments.

Failure to raise the debt ceiling could also lead to a partial government shutdown, which usually means temporary furloughs for certain government workers until a new spending bill is passed, The Wall Street Journal reported. During past shutdowns, the federal government has continued to make its regular payments to debtholders, retirees and others, so the main impact was felt by federal workers and contractors.

If lawmakers want to avoid another shutdown, they better get moving quickly. Back in September, Congress extended federal government funding through Dec. 3, but Treasury Secretary Janet Yellen recently said the U.S. will reach its debt ceiling on Dec. 15 instead, giving Congress a couple of extra weeks to act.

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If Congress doesn’t raise the debt ceiling by then and the government is forced to shut down, the Treasury Department might have to reduce its payments by more than 40%, according to estimates from Goldman Sachs.

As GOBankingRates reported, some of these cuts will directly impact Americans in a variety of ways. For example, veterans might not be able to access Veterans Administration call centers and hotlines. Federal loans to small businesses will no longer be processed during a shutdown, and the Federal Housing Administration will stop approving home loan applications.

Meanwhile, the Centers for Disease Control and Prevention, Food and Drug Administration and National Institutes of Health would be forced to furlough 43% of their employees, which could cause significant delays and reduction of services in the midst of a pandemic.

Such a scenario has caught the attention of Wall Street firms and former Treasury officials, who warn that a government default would be disastrous for financial markets and the U.S. economy.

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