Understanding the Debt Ceiling and Its Impact on the United States Economy

The “debt ceiling”

In the United States, the amount of public debt the government can accumulate is capped by a limit set by Congress.

Theoretically, the purpose of this “debt ceiling” (or ” debt ceiling in American) is to ensure that the government does not borrow more money than it can repay.

This ceiling was adopted for the first time in 1917 during World War I, and since then it has been raised several times to take account of the growing indebtedness of the federal government.

An important element of fiscal policy, it helps to ensure that the government maintains a sustainable level of indebtedness while allowing it to finance its expenditures.

After discussions

Because the debt ceiling must be raised periodically in order to allow the government to continue borrowing money to meet its recurring deficits, negotiations around its ceiling have become an acrimonious point between political parties in the United States. United.

When Congress debates raising the debt ceiling, there is often disagreement between Democrats and Republicans, not only on raising the amount of the limit, but, more importantly, on the conditions to be attached to that increase. .

These negotiations can become highly politicized as both sides seek to advance their own agenda and gain political leverage. In a divided government – ​​such as one where the House of Representatives has a Republican majority while the Democrats control the Senate – it is possible to block the increase of this ceiling.

In the context of deficit budgets, this constrains spending: in effect, because this makes budget deficits impossible, it torpedoes the new programs of the ruling party.

Continuous rise in public debt

The national debt of the United States has continued to grow over the years and today, in May 2023, it stands at over $31.7 trillion.

The Obama presidency and then the Covid-19 pandemic have played an important role in recent debt developments. Plans for tax relief, demand support, and revenue loss replacement have led to a significant increase in government spending, which in turn has pushed up the national debt.

The debt ceiling has been suspended several times in recent years to accommodate this growing debt, but negotiations over future increases remain a contentious issue.

Prohibition of deficits?

If the debt ceiling is not raised, the US government would be prohibited from running a deficit. It would therefore not be able to borrow additional funds to meet some of its obligations.

The press often mentions servicing its existing debt. Supposedly, this could lead to a default on US government debt, which would have serious consequences for the US economy and global financial markets.

Of course, a default would likely cause interest rates to rise sharply as investors demand higher returns to offset the increased risk of lending to the US government.

This, in turn, would make it more expensive for the government to borrow money in the future, which would further aggravate the debt problem.

In addition, a default would hurt the government’s credit rating, making it harder and more expensive for it to borrow money. It would also generate a loss of confidence in its ability to manage its finances, which could lead to a global financial crisis.

Guardrail

However, the receipts constantly enter the coffers of the federal Treasury which must, in priority, disburse the sums due on the debt. From a treasury perspective, there is an order of importance in spending and the payment of interest and debt principal is at the top of this hierarchy.

This important fact is hardly ever mentioned by the media, which prefers to sensationalise.

While the overall consequences of not raising the debt ceiling would be severe and far-reaching, with potentially catastrophic effects on the US economy and financial system, the fact remains that the likelihood is much less than having to lay off the armies of contractors who profit handsomely from the public windfall.

Because the Federal State receives tax revenues of all kinds throughout the year, the problem of a cessation of payment would only last a few days at most. As soon as a default occurs, any new revenue would be allocated to the payment of overdue interest.

Long terme

If the little media-political world, basically so unserious, often frightens itself with all these short-term disaster scenarios, we could ask ourselves if letting the national debt continue to swell to ever higher levels is a good thing in self.

As in the case of France (here and there), the explosion of public debt over the past decades could have serious consequences for the long-term health of the American economy.

First, it could lead to a significant increase in interest payments on the debt, which would consume a larger part of the state budget. This in turn could result in cuts to government programs or tax increases, which could stifle economic growth.

A high debt level could also make the United States more vulnerable to economic shocks and crises, as the government would have less flexibility to react to unexpected events.

In addition, a high level of debt could lead to a loss of confidence in the ability of the US government to manage its finances, which could undermine the status of the dollar as a reserve currency and reduce the country’s influence in the world. Mondial economy.

Overall, while a certain level of debt may be manageable, allowing it to balloon to ever-higher levels without a clear plan to address it could have serious consequences for the long-term health of the US economy.

The current debate

The Biden administration would do without this cap (ici) to continue to spend at will for electoral purposes.

In the very short term, Republicans can vote for multiple small cap increases.

For the presidency, each micro-extension of the ceiling, which makes it possible to last a few more days before the cessation of payment, is a waste of time.

As’explain economist Kevin Hassett, former chief adviser to President Trump:

“The greatest number of small increases in the ceiling [au cours de négociations] that we had was seven. […] With a deal, they could do a short-term extension to give themselves more time to negotiate.

I understand that there is a game of chicken going on, but, in the end, neither side wants to jump off the cliff.

The last thing is, remember, every time they do an extension on the debt limit in the Senate, it takes up a full day of their time.

The Senators are so lazy that they only have 20 or 30 working days left in the Senate for the rest of the year. So if they have to make seven temporary increases in the debt ceiling, it’s a victory for the Republicans.

That’s seven days Democrats can’t use to do other mischief, like endorsing judges Republicans don’t like. There’s pressure on Democrats to use Senate time to do whatever they want [vraiment]. »

The inevitable increase

These increases in the public debt ceiling are inevitable in a country without any budgetary discipline at the federal level.

This is all the more remarkable given that, conversely, forty-five of the fifty United States have one or more constitutional limits on the issuance of debt (ici). The amount of local debt is only 1.150 billion dollars while the states spend about a third of the public money. The amount of the federal debt is 31 735 billion dollars, while the federal government accounts for two-thirds of public expenditure.

If there is a lesson to be learned from all this, it is that it would have been preferable to adopt a constitutional amendment forcing a balanced budget rather than this bizarre rule of temporary increase in public debt which does not seem to work better than the famous 3% budget deficit imposed by the Treaty of Maastricht.