Created by Congress in the year of 1917, the debt ceiling basically sets the maximum sum of outstanding federal debt that the United States government may incur. The Treasury Department of the country reached its debt ceiling of $31.4 trillion in January 2023, and subsequent to months of debates, in June the lawmakers voted to suspend the ceiling till the January of 2025. As Kavan Choksi Business Consultant mentions, the US government has run a deficit averaging almost $1 trillion each year since 2001. This means that it spends that much more funds than it receives in taxes and other revenue methods. To make up for the difference, it therefore, has to borrow money in order to continue to finance payments already authorized by the Congress.
Kavan Choksi Business Consultant briefly discusses what might happen if the US hits its debt ceiling
Congressional action to suspend or raise the debt ceiling does not increase the financial commitments of a country. The decisions to spend funds are separately legislated. Over the last decade, the Congress has authorized trillions of dollars in spending.
This has led the United States debt to almost triple since 2009. The efforts to abolish or raise the debt ceiling have become a hot topic of heated debate among policymakers. Negotiations to alter the limit to try to force spending cuts have been made by a few lawmakers who decry government debt. Moreover, the congressional brinkmanship over the matter has led to disruptions, including a government shutdown.
If the US hits its debt ceiling and Washington declares that it can no longer pay its debts, things can get chaotic for both the United States and global economies. Even short of default, hitting the debt ceiling would hinder the ability of the government to finance its discerning operations. This includes providing funding entitlements such as Medicare or Social Security. The potential impact of reaching the debt ceiling includes increased borrowing costs for businesses and homeowners, downgrade by credit rating agencies, as well as a drop-off in consumer confidence that may shock the financial market of the United States and even tip its economy into recession.
The breach of the debt ceiling may halt around one tenth of the US economic activity. It may cause the loss of several million jobs, raise interest rates enough to increase the national debt by $850 billion, and even add $130,000 to the cost of an average thirty-year mortgage. Higher interest rates can additionally divert the future taxpayer money away from distinctive federal investment areas like healthcare, education and infrastructure. As Kavan Choksi Business Consultant mentions, on the whole, failure to not meet the obligations of the government may end up causing irreparable damage to the US economy, the livelihoods of several Americans and global financial stability. The creditworthiness of the United States treasury securities boosts the demand for US dollars, contributing to their value and status as the reserve currency of the world. Any hit to confidence in the US economy, no matter whether it is from default or the uncertainty surrounding it, could cause investors to sell US treasury bonds and potentially weaken the dollar.
