What the debt ceiling is?
Before we get to the actual problem that reaching the debt ceiling might cause, we must first fully understand the term and its requirement. The debt ceiling is a limit which is set to control the borrowing capacity of the United States. Once the ceiling is reached, the government cannot borrow any more money to fund their expenditure. It has become a controversial topic in the US politics and most political parties often use it to gain advantage in discussions about the government’s expenditure of funds. Ever since the inception of the debt ceiling, it has been revised over hundred times but the problem has become more complex.
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HISTORY:
The Second Liberty Bond Act was introduced in 1917 and the debt ceiling came as a part of it. The ceiling allowed the US government to finance its involvement in the first World War. The ceiling acted as a limit beyond which the government could not finance their ventures. As the United States has grown as a country over the last few years, they have increased the debt ceiling a number of times to allow them to borrow more to fund their innovations.
Why revising the limit is difficult?
Ever since its introduction, the debt ceiling has acted as an important tool to control the borrowing and spending power of the government of the United States. Although, the ceiling was increased and suspended numerous times from 1917, it is more controversial to revise it in the present situations. A few years back the debt ceiling got politicized as the Republicans in Congress refused to support the ceiling raise unless the expenditure of the government was significantly reduced.
This situation caused a financial turmoil not only for the United States but also for the businesses affiliated with the country. The issue once again recurred in 2013 when the Republicans again refused to raise the ceiling unless significant spending cuts were made. This led to a shutdown of the government for over a fortnight. Such a situation was also witnessed in 2017. The repeated occurrence of these situations has made it more difficult to revise the limit which could have drastic effects on the governance of the country in the long term.
Is the debt ceiling required?
Since the debt ceiling is a government imposed limit, it is possible at any point of time for the government to remove the limit entirely. Over the years economists have argued that doing this would actually be more beneficial for the country. However there are others who believe that the debt ceiling is an important tool which the government could use to keep a check on their expenditures. This prevents the government from getting into too much debt.
Consequences of not raising the limit:
There are numerous consequences of not resolving the debt ceiling problems on time. If the debt ceiling is not raised in due time, the government might default on its debt. This would in turn cause the valuation of the US dollar to plunge. Subsequent steps that the government takes to deal with this might cause a recession or job shortage in the country.
Solutions if the limit is not increased:
- In such a case, the government might focus more on paying off their outstanding debts and reduce their spending.
- There also exists an emergency fund which could be used in such situations.
- Another way could be bypassing the limit by the federal reserve’s interference in the matter.
Recent Updates:
On Monday, the Secretary of the United States Treasury, Janet Yellen had notified the Congress about the ongoing concerns regarding the debt ceiling. She warned that U.S. could default on its debt by June 1. She suggested that the situation could be averted if legislators raise the limit or suspend the nation’s borrowing authority before June. She further warned of a global financial crisis if quick steps were not taken to control the situation.
