The debt ceiling or limit was created by Congress in 1917. This ceiling sets the maximum sum of outstanding federal debt the government of the United States can incur. The Treasury Department reached its debt ceiling of $31.4 trillion in January 2023. Kavan Choksi points out that subsequent to several months of debate, lawmakers voted in June 2023 to suspend the ceiling until January 2025. The United States government has run a deficit averaging almost $1 trillion every year since 2001. This means that the country spends way more money than it receives in taxes and other revenue. In order to make up for the difference, the country has to borrow to continue to finance payments that Congress has already authorized.
Kavan Choksi underlines what may happen if the U.S. Hits Its Debt Ceiling
Over the last decade, Congress has authorized trillions of dollars in spending. This has led the debt of the United States to almost triple since 2009. As of June 2023, the total national debt stood at more than $32 trillion. The ability of the Treasury Department to borrow money to make payments on that debt has repeatedly run into a congressionally mandated limit on borrowing or the debt ceiling.
Efforts to abolish or raise the debt ceiling are among the hot of debate among policymakers. Many lawmakers who decry government debt have used negotiations in regards to altering the debt limit in order to try and force spending cuts. Disruptions, including government shutdowns, have been caused due to the congressional brinkmanship over the issue.
If the United States breaches the debt ceiling, and Washington declares that it can no longer pay its debts, the situation can cause significant chaos for the U.S. and global economies. Even short of a default, simply hitting the debt ceiling can hamper the ability of the government to finance its operations. Hence, it would not be able to provide funds for the national defence or entitlements such as Medicare or Social Security.
There are many detrimental potential repercussions of reaching the ceiling, starting from a downgrade by credit rating agencies to increased borrowing costs for businesses and homeowners. It may even lead to a drop-off in consumer confidence that may shock the financial market of the United States and tip its economy into immediate recession. It is estimated that a breach of the debt ceiling would immediately halt around one-tenth of U.S. economic activity, and cause the loss of several million jobs. It may also raise interest rates enough to increase the national debt by about $850 billion. Higher interest rates can subsequently divert the money of future taxpayers from discerning federal investments in areas like healthcare, education and infrastructure. Broadly speaking, failure to meet the government’s obligations can cause irreversible harm to the economy of the United States, the livelihoods of all Americans, as well as global financial stability. Kavan Choksi underlines that a U.S. default could also cause investors to sell U.S. treasury bonds and potentially weaken the dollar.