The debt ceiling is a legal limit on the amount of money that the United States government is allowed to borrow. The debt ceiling is set by Congress and has been raised or suspended 88 times since 1917. This will be the 10th time in the last 13 years the US government will come close to a potential default. The debt ceiling was created in 1917 to prevent the government from overspending. However, in recent years, it has become a political tool.
When the debt ceiling is reached, the government is unable to borrow any more money. This can lead to a government shutdown, which is when the government is unable to pay its bills. A government shutdown can have a negative impact on the economy, as it can lead to job losses and a significant decline in economic activity.
The debt ceiling is expected to be reached as early as next week, early in the month of June. If Congress does not raise the debt ceiling, the government will be forced to default on its debt. A default may have a prolonged negative impact on the economy, as it would lead to a loss of confidence in the U.S. government and a rise in interest rates.
There are several proposals to reform the current debt ceiling, some would even go as far as eliminating the debt ceiling altogether.
Raising the debt ceiling does not authorize any new spending. It simply allows the government to pay for spending that has already been authorized by Congress. The debt ceiling is a complex issue with far-reaching implications.
The debt ceiling ultimately boils down to the politics of the United States. It is a divide among the government, that is now questioning the ability to service its debts. A failure to reach an agreement regarding the debt ceiling would result in a “technical default”. Although treasury maturities may not be paid on time, there is zero concern about the government's ability to pay back the debt. Three of the five key figures within the debt limit debate were involved in the same situation in 2011; Joe Biden, Charles Schumer and Mitch McConnell. The United States government has collected $2.69 trillion in the fiscal year of 2023, while in February the Congressional Budget Office projected the annual net interest costs would amount to $640 billion in 2023.
Arguments for raising the debt ceiling:
- Raising the debt ceiling is necessary to prevent a government shutdown.
- A government shutdown would have a negative impact on the economy.
- The debt ceiling is a political tool that is often used to force the government to make spending cuts.
Arguments against raising the debt ceiling:
- Raising the debt ceiling is a form of government bailout.
- The government should not be allowed to spend more money than it takes in.
- Raising the debt ceiling encourages the government to overspend.
Berman , N. (2023, May 2). What happens when the U.S. hits its debt ceiling?. Council on Foreign Relations. https://www.cfr.org/backgrounder/what-happens-when-us-hits-its-debt-ceiling
Toms, M. (2023, May 19). Truth and consequence of a U.S. debt default. Voya Investment Management. https://institutional.voya.com/insights/trending-topics/truth-and-consequence-us-debt-default
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