Once again, a critical date in the US financial calendar is approaching. If Congress does not approve an increase in the federal budget before September 30, the executive branch will be forced to implement a shutdown of its activities on October 1, which would mean the suspension of the vast majority of government activities except those deemed essential become. as is the case with national defense.
The lack of an agreement would not be as catastrophic as it could have been during negotiations earlier this summer, when the result would have been a default on the country’s sovereign debt, which would have had negative consequences for the global financial system. A partial government shutdown would have limited adverse effects on economic activity but would not destabilize the financial system. The United States has already experienced periods of partial government shutdowns due to a lack of political agreement. However, situations like this undermine credibility regarding the strength of the US national debt. The recent threat not to raise the debt ceiling led to a downgrade of the country’s sovereign rating by one of the world’s major rating agencies.
Most likely, in the coming weeks we will see a temporary solution to this problem, which will consist of postponing the decision, which will lead to episodes in which fiscal policy will become the subject of political negotiations.
The United States should change its institutional design to eliminate the redundant debt ceiling approval process. The current arrangement requires Congress to approve not only the annual budget, but also the debt necessary to meet that budget. This can lead to situations where, if the debt ceiling is not approved, a government must decide whether to default on the budget or the debt ceiling.
Regardless, a process of budget consolidation is necessary. Calculations from the Congressional Budget Office, a technical and nonpartisan body, suggest that if this trajectory continues, the national debt, which stands at 97% of GDP today, will rise to 115% in a decade and to 192% in 2053 lead to significant interest rate increases, which would make loans more expensive for companies and households and could call into question the sustainability of the debt. The United States has been able to afford lax fiscal policy thanks to what Berkeley economist Barry Eichengreen calls the “exorbitant privilege”: the global reserve currency. But if he continues down the same path, he could challenge that privilege.