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 raised the alarm, stating that if a deal is not struck, the nation might begin to default on its debt as early as June 1.
Previous plans called for 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, the 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 debt ceiling was established in 1917, the year the US entered World War I, and since 1960, the Congress has raised or suspended the debt ceiling 78 times, according to the US Treasury Department. The debt ceiling is currently set at $31.4 trillion as of 2023.
According to the constitution, Congress is in charge of budgetary decisions. The debt ceiling was established so that the administration could operate more easily without constantly seeking approval from Congress for expenditures. It permitted the government to borrow as much money as was needed as long as it stayed under the debt ceiling, which must be approved by Congress.
This elevates the debt ceiling to the forefront of the ongoing struggle between the government and the legislature. This is made worse by the fact that the US political atmosphere is extremely polarised and that the executive branch and the legislative do not share the same ideologies.
On the one hand, there is Democratic President Joe Biden, who wants to raise the debt ceiling in order to keep all of the expensive campaign promises he made. Republicans, who control a majority in the House of Representatives, are the opposite. They are theoretically fiscal conservatives, but they also gain political advantage by undermining the president’s programme by refusing to raise the debt ceiling or lifting it only little 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, significant expenditure restraints on the government are included in current Republican proposals to raise the debt ceiling.
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 because the Treasury Department would be unable to make payments when they are due.
The US economy, all Americans’ lives, and the stability of the global financial system would suffer irreparable harm if the government’s commitments were not met, according to Treasury Secretary Yellen.
According to analysts, the currency would plummet after the debt default, the financial markets would crash, and tens of thousands of workers may lose their jobs. Simply put, a default is likely to have disastrous effects on the world economy, which is why Republicans are using it as a negotiating tool against Biden.
Additionally, any default would lower the US’s credit rating, which would cause investors to “demand much higher interest rates in the future to loan money to the government”, according to the NYT report.
Experts claim that the current dilemma is comparable to that of 2011, when Barack Obama (a Democrat) was president but the House of Representatives was under Republican control. Only when the Obama administration agreed to expenditure reductions totaling more than $ 900 billion did the crisis at the time come to an end, hours before the deadline.