Credit: (AP Photo/Jon Elswick)

The federal government is once again facing a hard limit on what it can legally borrow to cover its planned spending. That’s because the country’s debt ceiling, or debt limit, which needs to be approved by Congress, was reached on Thursday.

It’s not certain what Congress will do about the debt limit. With Republicans, who want to cut spending, now in control of the House, the potential is great for a political showdown with President Joe Biden and other Democrats over the issue.

Here are key questions and answers about that debt limit:

What is the federal debt limit, or debt ceiling? The debt limit is a legally authorized cap on the total amount of money the federal government can borrow to meet all its existing obligations, such as payments owed to Social Security and Medicare beneficiaries and the salaries of members of the military. The limit is subject to periodic renewal and was last set by the Congress in 2021, at $31.38 trillion.  

When will the federal government reach the debt limit and what happens when it does? The statutory borrowing limit was reached on Thursday, according to Treasury Secretary Janet Yellen. However, there would be no immediate outward impacts because Treasury has the legal authority to take “extraordinary measures” to ensure the government can continue to pay its bills, even without the ability to borrow additional funds, Yellen wrote in a letter to Congress earlier this month. In the same letter, she also indicated the government can continue to operate in such a manner until at least early June, a date she confirmed Thursday.   

Why is the debt limit controversial? The federal government routinely spends more than it generates annually in taxes, thus creating a deficit funded through debt. In turn, the debt limit must be increased from time to time, to maintain legally authorized spending. Raising the debt limit only allows the federal government to fund its previously authorized spending, but debates about future spending often take place when the limit itself is up for renewal. Moreover, the limit has also become prone to being exploited for political purposes, especially at times of divided government, such as this year when different political parties control the White House and the House of Representatives.   

What happens if the limit doesn’t get raised? In theory, when the federal government eventually runs out of the “extraordinary measures” referred to by Yellen, it could risk a default on an interest payment or payments, something that has never occurred. Economists have warned such a scenario could roil financial markets and trigger a recession. In her December letter to the Congress, Yellen said it was “critical” that action be taken on the debt limit, or it could risk doing “irreparable harm” to the U.S. economy.   

Why doesn’t this happen in New Jersey? Unlike the federal government, the New Jersey Constitution generally requires state government to operate each year with a balanced budget, meaning annual expenditures must line up with annual revenues at the start of each July-to-June fiscal year. This restriction also means the state’s bonds are generally only used to finance capital expenditures, such as new schools, roads and bridges, and not annual operations.

Watch: What happens next?