On Wednesday, amid concerns of a banking crisis, potential recession, and economic turmoil, Republicans at House of Representatives approved a bill to increase the debt ceiling of the United States government. In addition to raising the spending limit, the legislation involves cutting various federal expenditures and suspending programs aimed at combating climate change, as well as President Biden’s well-known initiative to forgive $10,000 in student loan repayments.
The US House of Representatives passed the Limit, Save, Grow Act of 2023 with a 217-215 vote, paving the way for a high-stakes showdown with the White House with just six weeks until the government risks defaulting.
🚨 BREAKING 🚨 House Republicans just passed the only plan in Washington that
1. Lifts the debt ceiling
2. Stops wasteful spending and inflation
3. Puts America back on trackNow Democrats should do their job.
Tune in for my press conference soon https://t.co/vmn31INPH5
— Kevin McCarthy (@SpeakerMcCarthy) April 26, 2023
Due to the Democratic Party’s majority in the Senate, the chances of the bill receiving approval are low, indicating the United States government is heading towards default.
Typically, the House of Representatives and Senate do not impose specific restrictions on federal spending while raising the debt ceiling. In the past, bipartisan deals were reached during the Trump administration without mentioning any specific limitations.
However, the recent action initiated by Republican Party members in the House of Representatives, led by Speaker Kevin McCarthy (R-Calif.), will have a substantial impact on the relationship between the Republican-controlled House of Representatives and the White House.
This article will explore the concept of the debt ceiling in the United States, its importance, and the potential consequences of a default.
What is the US Debt Ceiling and its significance
The US government has a legal limit on the amount of money it can borrow to finance its expenditures, known as the debt ceiling. This limit is set by Congress and restricts the total amount of debt that can be accrued through the sale of US Treasury bonds and other securities. Essentially, the debt ceiling acts as a cap on the amount of money that the government can borrow to sustain its operations.
The first debt ceiling
The debt ceiling was initially introduced during World War I in 1917 to grant Congress greater authority over the federal budget. Originally, the debt ceiling was a modest sum that was set annually. However, as federal spending and borrowing grew, the debt ceiling has been raised multiple times to accommodate these increases.
Current debt ceiling
As of now, the US debt ceiling stands at just under $31.4 trillion. However, the debt limit was actually reached on January 19, 2023. In response, the Treasury announced a “debt issuance suspension period” during which it can take “extraordinary measures” to obtain additional funds without exceeding the debt ceiling.
According to projections from the Congressional Budget Office, if the debt limit remains unchanged, the government will run out of options to borrow using these extraordinary measures between July and September 2023. This means that Congress will need to raise the debt ceiling in order to continue funding the government’s operations and avoid the potential consequences of defaulting on its debt.
Significance of Debt Ceiling
The debt ceiling holds great importance in regulating the amount of money the US government can borrow to fund its operations, granting Congress more control over federal spending. Its purpose is to prevent the government from becoming excessively dependent on borrowing and to ensure that it operates within a financial framework.
However, if the debt ceiling is not raised, it can have severe consequences for the US economy. It can harm the government’s credit rating, cause interest rates to rise, and potentially undermine confidence in the US dollar as a global reserve currency.
Contrary to popular belief, the US government has actually defaulted on its debt four times in the past. These instances include the default on the US government’s demand notes in early 1862, the overt default on its gold bonds in 1933, the refusal to honor its explicit promise to redeem silver certificate paper dollars for silver dollars in 1968, and the default on Treasury bills in 1979.
These events demonstrate that the US government is not immune to the risk of default and that careful management of its debt obligations is necessary to maintain the government’s financial stability and global economic standing.
What will happen if US government defaults
A default by the US government on its debt obligations, particularly Treasury bonds, would occur if Congress fails to raise or suspend the debt ceiling, which is the legal cap on government borrowing. The Treasury Department has warned that its cash and borrowing capacity could be depleted by early June 2023.
The potential fallout from a default would be severe for the US economy and global financial markets. Interest rates would surge, the US dollar would plummet, and the nation’s creditworthiness would erode. Disruptions to payments for millions of Americans relying on Social Security, Medicare, military and civil service salaries, and other government benefits would also occur.
The consequences could even trigger a recession or depression. As such, it is crucial that Congress acts to prevent a default before it’s too late.
