The US hits the debt ceiling
Source: By Alind Chauhan: The Indian Express
The United States hit its debt ceiling of $31.4 trillion on 19 January 2023, forcing the Treasury Department to initiate “extraordinary measures” to ensure that the federal government keeps paying its bills and can stave off default until June — when it will run out of funds.
With relations between Democrats and Republicans in Congress tense, commentators have been predicting that the Republican Party will “leverage the debt limit to make fiscal demands of President Biden”, according to The New York Times.
What is the debt ceiling?
The debt ceiling which was introduced in 1917 during World War I is the maximum amount that the US federal government can borrow to fulfill its financial obligations.
According to The NYT, as the government spends more than it earns through taxes and other revenues, it needs to borrow money in order to pay for expenses, such as social security and Medicare benefits, and the salaries of US military service members. In 2021, this borrowing limit was raised to $31.4 trillion.
What happens now?
In a letter to the House of Representatives Speaker Kevin McCarthy, Treasury Secretary Janet Yellen said that the Department is now taking special measures to make sure the government continues paying the nation’s bills.
A report by the BBC recalled that such measures have in the past involved steps such as temporarily suspending investments that the government is supposed to make into retirement and health benefit funds for federal employees, and “re-topping those funds at a later date”.
Yellen has already announced some accounting manoeuvres involving the Civil Service Retirement and Disability Fund, the Postal Service Retiree Health Benefits Fund, and the Federal Employees Retirement System Thrift Savings Plan.
What will happen if the debt ceiling is breached?
While urging lawmakers to quickly end their stand-off, the Treasury Secretary warned that if they failed to raise the debt limit by June, the government would default on its debt, which might trigger an economic catastrophe.
“Failure to meet the government’s obligations would cause irreparable harm to the US economy, the livelihoods of all Americans, and global financial stability,” Yellen wrote in the letter.
Once the debt default happens, analysts say that the dollar would weaken, the stock markets would collapse, and thousands of people might lose their jobs. This would also make investors “demand much higher interest rates in the future to loan money to the government”, according to the report in The NYT.
Has the US breached the debt ceiling earlier?
No, the US has never breached the debt ceiling so far. However, experts suggest that even approaching debt default might severely impact the economy in the longer run.
In 2011, congressional Republicans and then President Barack Obama fought a prolonged, bruising battle over the debt ceiling that continued until just before the deadline for action ran out. Even so, ratings agency Standard & Poors downgraded the country’s credit rating for the first time, which made it more costly for the US federal government to borrow money thereafter, a report in The Guardian recalled.
What is the role of partisanship in the current crisis?
Fights over the debt ceiling — or altering the debt ceiling — isn’t new in the US. As per the BBC report, since 1960, Congress has raised, extended, or revised the definition of the debt limit 78 times. But in recent years, as polarisation has widened and deepened in American politics, and the political divide has become harder and starker, the fights over the debt ceiling have intensified.
Reports have noted that over the past decade, Republicans in Congress have used the issue as a bargaining chip to negotiate spending cuts. Even in 2011, the crisis had ended only after the Obama administration, under great pressure from the Republican majority House of Representatives, agreed to spending cuts worth more than $900 billion.
This time too, the GOP lawmakers have made their intentions clear — they have vowed that they will not raise the borrowing limit again unless President Biden agrees to steep cuts in federal spending, The NYT reported.
The GOP currently has only a narrow majority in the House, and Democrats have said they would not engage in “any negotiations”. The battle for the debt limit is bound to get uglier as the deadline approaches.
