If Congress doesn’t raise the debt ceiling by the end of the month, the US government may begin to run out of money. DW considers a potential debt default’s broader effects.
What is the US debt ceiling, and why is it important?
The debt ceiling, or the maximum amount of money the government might borrow, was originally established by the US Congress in 1917. As a result of the measure, the government could now issue debt without seeking legislative authorization. Following that, the Public Debt Acts were passed in 1939 and 1941.
The debt ceiling has been raised an astounding 78 times over the past seven decades, including in 2011, when the delay in approving a new limit led to the US losing its coveted AAA credit rating, which caused a rise in borrowing prices.
The country’s current $31.4 trillion ($28.6 trillion) debt ceiling was hit in January, but the Treasury Department took unprecedented steps to keep funding federal operations.
Early June is the next crucial date that is quickly approaching. If the ceiling is not raised by then, the US government could start to run out of money and start to default on its obligations.
The Democrats and Republicans are engaged in a bitter stalemate over the White House’s refusal to accede to significant cuts in public expenditure as well as other measures.
To try to resolve the conflict, top Republican leaders met US President Joe Biden on Tuesday at the White House. However, the talks ended without making a significant progress.
What Effects Would a Default on Debt Have on the World Economy?
The deadlock, according to US Treasury Secretary Janet Yellen, is essentially a “gun to the head of the American people and the American economy.”
If the debt ceiling wasn’t raised, “financial and economic chaos would ensue,” she claimed.
The US government will start to run out of money as early as June 1, according to a forecast made by the Treasury Department last week. This will have a significant impact on both the US economy and the world economy.
The US Treasury would likely have to prioritise spending in order to pay down debt and interest first due to a lack of finances.
The payment of salary to tens of millions of public sector employees, including teachers, could be delayed as a result.
Veterans of war and other elderly and disadvantaged Americans may not receive their social security benefits or healthcare subsidies.
Even though any debt default would probably only last a short while, according to Biden’s economic advisors, even a “brief” default would cost the US economy 500,000 jobs.
They predict that a “protracted” default would cause the economy to contract by 6%, wiping out 8.3 million jobs, or nearly as many as were lost during the 2008 financial crisis.
In the worst-case scenario, the US would have to completely halt borrowing by July or August, which would cause even more havoc on the world’s financial markets.
The value of US bonds, which are among the safest investments and act as the foundation of the global financial system, would then be called into doubt by investors.
The rest of the globe could enter a serious recession and global trade could be badly weakened by a default.
A more significant default would result in a sharp drop in the value of the US dollar, erratic changes in exchange rates, and an increase in the cost of commodities like oil.
Due to the loss of confidence in the banking system, global inflation may well increase once more, and supply chain problems that slowed commerce during the COVID-19 outbreak may become even more serious.
What Are The Main Obstacles?
The Republican Party and House Speaker Kevin McCarthy are opposed to raising the debt ceiling without significant budget cutbacks.
In a planned budget package that would end tax advantages for investments in clean energy and undo Biden’s plan to forgive student loan debt, the House of Representatives, which is controlled by Republicans, agreed in late April to make cuts totaling almost $4.8 trillion.
The Senate, with its Democratic majority, has no chance of passing the law, though.
Biden has so far declined to engage in negotiations, stating that the debt ceiling should be increased without restrictions before talking about potential budget cuts.
The US president wants the Republicans to publicly promise that the country won’t go into default and that it will be able to continue borrowing in order to pay all of its obligations.
The Obama administration was forced to make costly concessions to the Republicans in 2011 while Biden served as vice president, and the US president is anxious to prevent a repetition of that climbdown.
The majority of the $3 trillion deficit reduction under Biden’s budget plan would come from higher taxes on the rich, which the Republicans are unlikely to support.
McCarthy estimated that the two parties had as few as two weeks to come to an agreement that could then be approved by Congress after the fruitless talks between Biden and senior Republican and Democratic leaders on Tuesday.
However, other analysts continue to believe that the debt limit’s expiration should be postponed until September 30 in order to reduce the possibility of default occurring right away.
What More Might Biden Do?
The US Constitution’s 14th Amendment, which provides that “the validity of the public debt of the United States, authorised by law,… shall not be questioned,” might theoretically be invoked by the president.
Some commentators think Biden can use the constitutional obligation to prevent default as justification to exceed the debt ceiling in order to maintain the expenditure that Congress has already authorised.
Republicans have cautioned that Biden cannot take unilateral action and that Congress must pass legislation to solve the problem.
A union representing public sector employees filed a lawsuit against Biden and Treasury Secretary Janet Yellen this week, claiming that they are required by the Constitution to disregard the debt ceiling.
In the case of a default, the lawsuit seeks to prevent workers from suffering consequences while debt payments are given priority.