On December 19, U.S. President-elect Trump said he would support the complete elimination of the federal debt ceiling more than a century after the ceiling was established.The debt ceiling has long been a political bargaining chip for the opposition, because when the government borrows uncontrollably to threaten the security of the debt, the consequences will be unimaginable.

Now, the U.S. federal debt is about to approach the debt ceiling.It is foreseeable that discussions about federal government debt will recur for some time to come.

In this article, Hawk Insight will provide you with an article analyzing the principles of the debt ceiling and the potential consequences it may have after its cancellation.

What is the debt ceiling?

This was the first time the U.S. government borrowing limit was established by the U.S. Congress in 1917.As lawmakers continue to enact bills that make spending exceed government revenue, the Treasury must continue to increase borrowing, driving up debt.This requires resolving the debt ceiling issue, otherwise you will face the risk of default.The last time action was taken was in June 2023, when lawmakers suspended the debt ceiling until early 2025.

What will happen if the debt ceiling is restarted?

From January 2, the Treasury will no longer be able to increase the debt limit, which had exceeded $36 trillion as of December 18.Because the federal government will continue to spend more than it earns, the Treasury will need to reduce its cash reserves to continue meeting its obligations, including payments to government bondholders, retirees and veterans.As of December 17, the U.S. Treasury had a cash balance of approximately $831 billion, which may be enough to support the Treasury for several months.In March, the Treasury Department will receive large amounts of cash from personal taxes due in mid-April.

At the same time, the Treasury will take so-called extraordinary measures-essentially accounting techniques that have been tried and tested for decades-to ensure its cash reserves are not completely exhausted.These measures include suspending the reinvestment of treasury bonds held by various government funds, including pension funds for government employees, until the debt ceiling is suspended or raised again.

But these measures can only last until the so-called "moment X," when the Treasury is no longer able to meet all of its obligations.Bond market strategists predict that this moment could come between mid-to-end 2025.Treasury ministers typically don't specify what the Treasury department would do in the worst-case scenario if Congress failed to raise or suspend the debt ceiling.

Why did Trump lift the debt ceiling?

The debt ceiling is a headache that every government has to face.During Trump's first term, the need to raise or shelve the cap gave Democrats leverage to negotiate more spending in a budget deal with a Republican president.Trump's top fiscal priority next year is to extend the personal income tax cut he promulgated in 2017 and will expire at the end of 2025.The non-partisan Congressional Budget Office (CBO) has warned that a full extension will add trillions of dollars to government borrowing needs over the next decade, leading to a build-up of debt.The need to resolve the cap issue could complicate negotiations for Congress to approve a tax cut extension.

Will Congress lift the debt ceiling?

In fact, most Republicans have historically been reluctant to vote for raising the debt ceiling, which they believe is incompatible with controlling budget deficits.On December 19, Democratic Progressive Senator Elizabeth Warren posted on X that the debt ceiling amounted to political "hostage taking."

Brendan Boyle, a senior House Democrat, has previously proposed legislation that would authorize the Treasury Secretary to unilaterally increase the cap while retaining Congress's power to vote down the measure.Outgoing Treasury Secretary Janet Yellen said at a 2022 hearing that she "strongly" supports the proposal."It's crazy to face debt ceiling crises regularly," she said.”

What will be the consequences of lifting the debt ceiling?

In addition to the relief of staff at the Ministry of Finance's Office of Domestic Finance, removing the cap would also avoid the major disruption to the bond market every time the cap becomes a problem.When the ceiling is reached, U.S. debt managers cut back on issuance of Treasurys, causing money-market funds and other investors to lose a large proportion of the securities they rely on to store cash.When the cap is raised or shelved, the market has to absorb large amounts of Treasuries while the Treasury rebuilds its cash balance.

In past debt-limit confrontations, credit rating agencies have also warned that these incidents have damaged the U.S. fiscal credibility.Fitch Ratings reviewed the United States in the last debt limit battle and ultimately downgraded it one notch to AA+, even after the cap was shelved.

If the debt ceiling is broken, what will be the worst outcome?

If action cannot be taken before the Treasury runs out of payments, the Treasury secretary-for which Trump has nominated Scott Bessent-will face the tough task of deciding whether to prioritize certain debts over others.A common assumption among economists and bond market participants is that the Treasury will use the cash and revenue it has to ensure payment of treasury bills.This assumption relies in part on records of emergency conference calls held by the Federal Reserve in 2011 and 2013 during past debt limit gridlock.

Because Treasurys are the world's largest bond market and a benchmark for global borrowing costs, failure to repay debt could cause a shock and trigger a financial meltdown-a risk that government officials are reluctant to take.Assuming that the Treasury continues to pay debt securities, the government will next need to decide whether to continue to pay a significant amount of other debt, including social security payments, federal wages and operating costs for government agencies.

Observing the US fiscal background from the perspective of the debt ceiling

The U.S. government's fiscal situation is more challenging than ever.The budget deficit in 2024 reached its highest point since the epidemic-a gap of US$1.83 trillion, or 6.4% of GDP.The outgoing Biden administration predicts that the deficit will exceed 6% in 2025 for the third consecutive year.

There is no single factor contributing to the widening gap.The U.S. Congress and the White House have ignored warnings from budget experts urging spending limits for years, instead enacting spending and tax packages that increase the government deficit.Emergency plans to deal with the epidemic, steady growth in spending on health care and retirement benefits, and rising crucial interest costs have all added to the debt burden.

How will this round of debt ceiling be rescued?

Congressional leaders will either consider legislation on the debt ceiling or put it on hold when the Treasury starts running out of cash and takes extraordinary measures.At the same time, Yellen is expected to write to Congress in the coming days or weeks to provide lawmakers with the Treasury Department's rough estimate of when the debt ceiling may become binding.Given that inflows and outflows of tax and other funds may change, she is unlikely to provide a precise date, but she will likely point to a month or a point in time after which the United States will be able to meet its obligations becomes less certain.