The U.S. House of Representatives could vote as soon as later today on Republicans’ “One Big, Beautiful Bill Act” (OBBBA). Yes, that name really is what has been given to the legislation. As we explained in our column last week, the OBBBA includes massive spending cuts, particularly for Medicaid and other health care programs, and roughly $4 trillion in tax cuts, credits, and deductions to be distributed over the next 10 years.
The OBBBA also would raise the federal government’s statutory debt limit by $4 trillion.
The anticipated vote would come after a key ratings organization downgraded the United States’ debt rating late last week and after another major global organization warned U.S. officials about the country’s growing national debt.
What is the statutory debt limit, what did the organizations raising red flags about U.S. debt say exactly, and how are these issues likely to affect consumers, taxpayers, recipients of federal government benefits, and the national and global economies?
Let’s take a look.
What Is The Federal Government’s Statutory Debt Limit?
As the U.S. Department of the Treasury has explained, the United States’ statutory debt limit is the total amount of money the U.S. government is authorized to borrow in order to meet its existing legal obligations for federal spending. (That includes its obligations for Social Security and Medicare benefits, military salaries, interest on the national debt, tax refunds, and all other federal programs and payments.)
Importantly, as the Treasury Department has noted, the debt limit “does not authorize new spending commitments. It simply allows the government to finance existing legal obligations that Congresses and presidents of both parties have made in the past.” (Keep this explanation in mind as you listen to the debate on Capitol Hill this afternoon.)
According to the Treasury Department, since 1960 Congress has acted 78 separate times to permanently raise, temporarily extend, or revise the definition of the debt limit. Forty-nine of those occurrences came when a Republican was sitting in the Oval Office; 29 increases happened when there was a Democrat serving as president.
The federal government reached its current $31.4 trillion debt limit this past January. Since then, the Treasury Department has been using a series of “extraordinary measures” to keep the country from breaching the limit and defaulting on its debt. It is still unclear exactly when those measures will no longer be sufficient. In a letter sent to House Speaker Mike Johnson (R-LA) on May 9, Treasury Secretary Scott Bessent acknowledged there is “significant uncertainty” about the predicted breach date, but said it is most likely to occur in August. As such, he recommended Congress act to increase or suspend the debt ceiling early this summer.
Hence the OBBBA.
But what happens if Congress does not approve the OBBBA and its debt limit increase?
As the Brookings Institute has explained, if the federal government breaches the debt limit, its “ability to pay its bills will be limited by the amount of revenue it collects each day.” In other words: Treasury Department officials — likely with the input of the Trump White House — would have to choose which programs are funded and which get nothing. In 2021, then-Treasury Secretary Janet Yellen warned breaching the debt limit would put “[e]very Social Security beneficiary, every family receiving a Child Tax Credit, every military family waiting for a paycheck or small business owners receiving a federal loan … at risk.”
These outcomes may be similar to the ones felt during a federal government shutdown, but, as the Bipartisan Policy Center (BPC) has made clear, default is distinct from a shutdown.
“A government shutdown temporarily halts certain government services when Congress fails to enact appropriations bills on time,” the BPC has explained. “A default on our debt is much more severe, fueling economic uncertainty and jeopardizing the nation’s creditworthiness. There have been two major shutdowns since 2000, while the U.S. has never systematically defaulted in modern history.” More on this outcome below, but first: how worried are observers about the United States’ debt situation?
The answer is: very.
IMF, Moody’s Analytics Warn U.S. Debt Is Growing Too Fast
In an interview with the Financial Times that was released Tuesday, International Monetary Fund (IMF) First Deputy Managing Director Gita Gopinath warned U.S. officials that it is far past time to rein in the country’s “ever increasing” national debt. “The U.S. fiscal deficits are too large and they need to be brought down,” Gopinath said. “It should be that we have fiscal policy in the U.S. that is consistent with bringing debt to GDP down over time.”
Gopinath’s warning came on the heels of Moody Analytics’ decision to downgrade the United States’ credit rating due to increasing government debt and interest payment ratios.
“Successive U.S. administrations and Congress have failed to agree on measures to reverse the trend of large annual fiscal deficits and growing interest costs,” Moody’s said. More specifically, the ratings agency said it is concerned that the U.S. government will not be able to generate enough tax revenue to cover interest on its debt. (The U.S. government paid more than $1.1 trillion just in interest to service its debt in 2024, a number that was higher than the U.S. Department of Defense’s entire budget in the same year.)
As such, last Friday Moody’s cut the United States’ creditworthiness from a perfect AAA grade to the next-best level: Aa1.
Other ratings agencies already had taken this step. S&P downgraded the United States’ credit rating way back in 2011 while Fitch Ratings cut its rating for the United States in 2023.
Still, Moody’s decision was a blow. After all, the ratings agency had not lowered the U.S. credit rating since 1919. Additionally, as AXIOS noted, “U.S. debt is now deemed by Moody’s to be a riskier proposition for investors than debt issued by a dozen countries, including Australia, Canada, New Zealand, and the Netherlands.”
What Happens If The United States Does Not Raise The Debt Limit?
Breaching the debt limit would be a big deal.
Just ask the Treasury Department. “Failing to increase the debt limit would have catastrophic economic consequences,” the department’s website has pronounced. “It would cause the government to default on its legal obligations — an unprecedented event in American history. That would precipitate another financial crisis and threaten the jobs and savings of everyday Americans – putting the United States right back in a deep economic hole, just as the country is recovering from the recent recession.”
Others agree the consequences would be devastating.
“Goldman Sachs economists have estimated that a breach of the debt ceiling would immediately halt about one-tenth of U.S. economic activity,” Noah Berman from the Council on Foreign Relations wrote in 2023. “According to center-left think tank Third Way, a breach that leads to default could cause the loss of three million jobs, add $130,000 to the cost of an average thirty-year mortgage, and raise interest rates enough to increase the national debt by $850 billion. In addition, higher interest rates could divert future taxpayer money away from federal investments in such areas as infrastructure, education, and health care.”
The negative outcomes would not be limited to the United States, either.
“Any hit to confidence in the U.S. economy, whether from default or the uncertainty surrounding it, could cause investors to sell U.S. treasury bonds and potentially weaken the dollar,” Berman wrote. “Over half of the world’s foreign currency reserves are held in U.S. dollars, so a sudden decrease in the currency’s value could ripple through the market for treasuries as the value of these reserves drops. As heavily indebted lower-income countries struggle to make interest payments on their sovereign debts, diminished value of foreign currency reserves could threaten to tip some emerging economies into debt or political crises.”
Will the threat of default be enough to convince the House Republicans who are skeptical of the OBBBA — not to mention Senate Republicans and Democrats — to vote for the budget reconciliation bill? Only time (and perhaps global markets) will tell.