The US government could default on its loans in early June if the debt ceiling isn’t addressed.
Why it matters: The debt ceiling has become a contentious political issue in the United States. A limit that Congress imposes on the amount of debt that the United States government can have outstanding, the debt ceiling has become a wedge between parties—and it affects the entire economy.
When the debt ceiling is reached, the government is no longer able to borrow money to pay its bills, which can have serious consequences for the economy. Yet even punting conversations around the debt ceiling has had negative impacts in the past. The current debt ceiling fight has resulted in a sharp downturn in energy prices, for example.
What is the debt ceiling?
The debt ceiling is a limit on the amount of debt that the US government can have outstanding at any given time. Until 1917, Congress authorized every debt issued. That year, it amended its rules on debt to provide more flexibility in spending during World War I. The “ceiling” was an aggregate limit authorized in the Second Liberty Bond Act of 1917.
The debt ceiling is set by Congress and is intended to prevent the government from accumulating too much debt. When the ceiling is reached, the government is no longer able to borrow money to pay its bills, which can have serious consequences for the economy. In both 2011 and 2013, a debt ceiling crisis ensued when Congress could not agree on a spending budget.
Why does the debt ceiling matter?
If the debt ceiling is reached and the government is no longer able to borrow money, it may be forced to cut spending, which can lead to a slowdown in the economy. And if the government is unable to pay its bills, it could result in a default on its obligations, which could have severe consequences for the financial markets.
The debt ceiling can also have political implications. The debate over the debt ceiling is often contentious and divisive, and can lead to political brinksmanship. In the past, there have been instances where the debt ceiling has not been raised, which has led to government shutdowns and other economic disruptions. In 2011, Standard & Poors issued its first-ever downgrade of the US government’s credit rating due to partisan fighting over the debt ceiling. This caused the Dow Jones to fall by nearly 2,000 points in July and August, including a 635-point drop on August 8, 2011.
Finally, the debt ceiling is important because it reflects the government’s fiscal policy. The level of the debt ceiling is an indicator of the government’s willingness to borrow money to finance its spending. If the debt ceiling is raised frequently, it may indicate that the government is spending beyond its means and is relying too heavily on debt to finance its activities.
What are the implications of not raising the debt ceiling?
If the debt ceiling is not raised, the government would be unable to borrow money to pay its bills. The government would have to rely on its existing revenue streams to pay for its activities, which would likely result in significant spending cuts. This could lead to a slowdown in economic growth, and it could also result in job losses and other economic disruptions.
Additionally, if the government is unable to pay its bills, it could result in a default on its obligations, which could tank financial markets. A default means that the government would be unable to pay its creditors, which would likely lead to a downgrade of the government’s credit rating. This could result in higher borrowing costs for the government and could also lead to higher borrowing costs for businesses and consumers.
What are the arguments for and against raising the debt ceiling?
Those who argue in favor of raising the debt ceiling point out that the government needs to be able to borrow money to finance its activities. They argue that the debt ceiling is an arbitrary limit that doesn’t reflect the true needs of the government, and that raising the debt ceiling is necessary to prevent economic disruptions.
Those who argue against raising the debt ceiling claim that the government needs to control its spending and should not rely on borrowing to finance its activities. They argue that raising the debt ceiling will only lead to more government spending and will contribute to the growing national debt.
Of course, in a partisan landscape these arguments are often more contentious and serve as shields for other agendas.
What is the current status of the debt ceiling?
The US is again approaching its debt ceiling limit. The Treasury Department has previously implemented “extraordinary measures” to prevent the US from defaulting on its debts, but these measures are only temporary solutions.
As of now, there is no clear agreement on how to raise the debt ceiling, with both parties advocating for different approaches. The Democrats are pushing to raise the debt ceiling through the reconciliation process, which would allow them to bypass Republican opposition. Republicans, on the other hand, are calling for spending cuts and reforms to entitlement programs as a condition for raising the debt ceiling.
The current status of the debt ceiling is uncertain, but it is a critical issue that needs to be addressed in a timely manner. Failure to raise the debt ceiling could have serious consequences once again.