The United States’ ability to service its debt is dangerously close to failing.
Although the US Congress must vote to raise the country’s borrowing limit, Republicans, who control the US House of Representatives, are at odds with President Joe Biden over their insistence that any debt limit rise be contingent on spending restrictions and other policy demands.
Meanwhile, US Treasury Secretary Janet Yellen has warned that if officials do not reach a deal, the nation might start to default on its debt as early as June 1.
Previous plans called for Joe Biden to join Fumio Kishida of Japan, Anthony Albanese of Australia, and Narendra Modi of India at the Quad meeting in Sydney the following week. However, Joe Biden debt ceiling talks in Washington have forced Biden to postpone his travel.
Simply expressed, the “debt ceiling” or “debt limit” refers to the total amount of debt that the federal government may incur to meet its financial obligations.
Usually, the government spends more than it takes in. To pay for expenses like social security, Medicare, military and other salaries, interest on the national debt, tax refunds, etc., borrowing is necessary.
The US established the debt ceiling in 1917, the year it entered World War I. Since 1960, Congress has raised or suspended the debt ceiling 78 times, according to the US Treasury Department. As of 2023, the debt ceiling is set at $31.4 trillion.
According to the Constitution, Congress is in charge of budgetary decisions. The debt ceiling was established to allow the administration to operate more easily. It prevents the need to constantly seek approval from Congress for expenditures. The government can borrow as much money as needed, provided it stays under the debt ceiling. Congress must approve this ceiling.
This elevates the debt ceiling to the forefront of the ongoing struggle between the government and the legislature. The situation is worsened by the highly polarized US political atmosphere. The executive branch and the legislative branch do not share the same ideologies.
On one side, there is Democratic President Joe Biden, who wants to raise the debt ceiling to fulfill his expensive campaign promises. On the other side are the Republicans, who control a majority in the House of Representatives. They are theoretically fiscal conservatives. However, they also gain political advantage by undermining the president’s program. They do this by refusing to raise the debt ceiling or by lifting it only slightly more than Biden wants.
Furthermore, Republican lawmakers have added unrelated issues to the package given the serious ramifications of not lifting the debt ceiling. For instance, current Republican proposals to raise the debt ceiling include significant expenditure restraints on the government.
Chuck Schumer, the majority leader of the Senate (D-NY), said on Tuesday that “nobody should use default as a hostage.” “The consequences would be devastating for America,” Schumer continued.
The US would experience its first-ever default if the debt ceiling is exceeded. This is because the Treasury Department would be unable to make payments when they are due.
Treasury Secretary Yellen has warned that a default would cause irreparable harm to the US economy. It would impact all Americans’ lives and the stability of the global financial system.
Analysts predict that the currency would plummet after a debt default. Financial markets would crash, and tens of thousands of workers might lose their jobs. Simply put, a default is likely to have disastrous effects on the world economy. This is why Republicans are using it as a negotiating tool against Biden.
A default would also lower the US’s credit rating. According to a NYT report, this would cause investors to demand much higher interest rates to loan money to the government in the future.
Experts compare the current dilemma to that of 2011. Back then, Barack Obama, a Democrat, was president, but the House of Representatives was under Republican control. The crisis ended hours before the deadline when the Obama administration agreed to expenditure reductions totaling more than $900 billion.