News: Debt ceiling: What’s next for the US debt limit

 

 

US lawmakers have temporarily put off a dangerous game of brinkmanship over lifting the debt ceiling – a limit on how much the US government can borrow.

Treasury Secretary Janet Yellen had warned Congress that the country would reach its ceiling by 18 October.

Republicans dared Democrats to resolve the conflict alone. Democrats called that move reckless. The showdown prompted fears of a default on the national debt.

But with the deadline only days away, Congress has voted to extend the debt limit through early December, putting off the drama for a few weeks.

Default is still unlikely and has never happened in US history but if it did, it would have catastrophic implications for the US and the global economy.

Impasses over the debt ceiling are not new in Washington politics, but amid a sluggish economic recovery from the ongoing Covid-19 pandemic, there were some jitters in financial markets.

Here’s what you need to know about the debt ceiling debate.


What is the debt ceiling?

The US government spends more money than it collects in taxes, so it borrows to make up for the shortfall.

Borrowing is done via the US Treasury, through the issuing of bonds. US government bonds are seen as among the world’s safest and most reliable investments.

In 1939, Congress established an aggregate limit or “ceiling” on how much debt the government can accumulate.

The ceiling has been lifted on more than 100 occasions to allow the government to borrow more. Congress often acts on it in a bipartisan manner and it is rarely the subject of a political standoff.

As the country has become more bitterly partisan, however, lawmakers have used the debt ceiling vote as leverage against other issues.

In a 2013 standoff, the last time the US was in serious danger of going over a “debt cliff”, Republicans put up a blockade over the spending plans of President Barack Obama, a Democrat.

What would have happened without a raise?

For the first time ever, sometime in the second half of October, the US would have defaulted on its debts – which currently stand at around $28tn (£21tn).

Such an event would cause delays or bring service adjustments to every single government program currently available, while also affecting federal funding for individual states.

A Goldman Sachs report has estimated the US Treasury would need to halt more than 40% of expected payments and financial aid to US households.

The Pentagon released a statement last week expressing concern that service members too may not be paid in full or on time.

The default may also trigger a spike in interest rates and ruin America’s creditworthiness, making the US a more expensive place to live and damaging the economy. It would also bring turmoil to the stock market.

In a Wall Street Journal opinion piece last month, Secretary Yellen warned of “a historic financial crisis” that would leave the US “permanently weaker” if the debt ceiling was not raised.

Not raising – or temporarily suspending – the debt ceiling also threatens the health of the global economy, which would compound the impacts of the ongoing once-in-a-century public health crisis.

Investors around the world may sell-off US assets and become less trusting of the US dollar, which has functioned as the world’s reserve currency for decades.

The International Monetary Fund (IMF) has called for an end to Washington’s “counterproductive brinkmanship” over the debt ceiling. It also suggested the cap should be replaced with an alternative financial mechanism.
 
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