Tuesday, October 3, 2023

US debt ceiling: what is it, why does it matter to the world, and what’s next?

A preliminary agreement between the White House and Republican leaders on the suspension of the United States debt ceiling took weeks of negotiations. However, this is just the start of a more thorny discussion: the legislative debate.

The United States is fast and dangerously approaching the June 5 deadline when it could miss what many have called “catastrophic” not only for the country’s economy, but for the rest of the world.

On that day, according to the Treasury Department, the nation’s treasury will run short of money to meet its obligations. Unless Congress passes the bill, a draft of which is already being circulated among members of both parties.

But what is the debt ceiling and why is it so important to the world economy?

Suspension of payments, the main fear in the corridors of the Capitol

America’s fiscal year begins each October 1, and to finance its budget, Washington regularly sets a limit on federal borrowing, which today equals about 120% of the nation’s annual economic output.

That limit was crossed in January, less than four months after the start of the fiscal year. The Treasury Department has kept liabilities within limits with extraordinary measures while continuing to borrow from investors.

But the Treasury warned those measures may not be enough until June 5. Because the Treasury borrows about 20 cents for every dollar spent, at which point Washington will begin defaulting on lenders, citizens, or both.

The last surplus of the US economy was in 2001 © France 24

Eliminating the debt limit would allow the government to pay for spending that Congress had previously authorized. But his critics argue that a free hand is being given to excessive spending that is fueling the growing deficit.

There is already a preliminary agreement… What’s next?

This disastrous scenario could be forgotten if Congress approves a deal reached over the weekend by Democratic President Joe Biden and Kevin McCarthy, the main Republican in Congress, to suspend the debt ceiling, which stands at $31.4 trillion today.

The preliminary agreement lacks a legislative process. © France 24

The legislature has one week to approve the bill. First, in the House, which Republicans control with a 222-213 majority. A simple majority (at least 218 votes if all members are present) is required for approval.

Debate and approval could take a day or two in the lower house and are expected to take longer in the Senate. Democrats lead 51-49 in the Upper House, and Vice President Kamala Harris casts the tiebreaking vote if the vote is 50-50.

The road is not entirely clear, if one takes into account that some extreme right-wing Republicans or some moderate Democrats who are unhappy with the negotiations with their respective leaders may vote negative. But a legislative failure is the saddest and least desirable scenario.

Why do decisions in Washington affect the rest of the world?

A blow to the world’s largest economy will reverberate through global financial markets, as the value of US bonds came into question. These assets are among the safest investments and serve as a reference for the global financial system.

Additionally, according to experts, it is almost certain that the United States economy will enter a recession if the government stops paying for critical items such as soldiers’ pay or Social Security benefits for senior citizens.

In a worst-case scenario, economists expect millions of Americans to lose their jobs and ratings agencies could downgrade America’s credit rating, as happened in 2011.

with Reuters and AP

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Nation World News Desk
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