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Impending US Debt Ceiling Deadline Sparks Negotiations and Potential Consequences

by Sean Tweedie | May 30, 2023

US debt ceiling deadline

In the past weeks, concerns have been mounting over the possibility of the United States defaulting on its debt unless the debt ceiling, currently set at USD 31.4 trillion (as shown by the red line in Figure1) debt ceiling is raised, the deadline set by the US Treasury Secretary Janet Yellen of 01 June 2023 steadily approaching. However, it is worth noting that raising the debt ceiling is a regular occurrence, as the US Congress has raised it 40 times over the past 45 years.

figure 1

The US debt ceiling is the statutory limit on the total amount of money that the United States government is authorised to borrow to fulfil its financial obligations. It represents the maximum level of debt that the federal government can accumulate. The debt ceiling is set by the US Congress and serves as a control mechanism to ensure that the government’s borrowing remains within a certain boundary.

When the government’s outstanding debt nears the existing debt ceiling, the Treasury Department is required to take certain extraordinary measures to meeting its financial obligations without breaching the limit. These measures, which include suspending investments in certain government funds and prioritising principal and interest payments on Treasury securities while delaying any other payments, are temporary and can only provide a limited period of time for the government to operate before hitting the debt ceiling.
Failure by Congress to raise or suspend the debt ceiling in a timely manner, poses a significant risk of default on the government’s debt obligations. Such a scenario could have severe consequences, including a loss of confidence in the US economy, a spike in borrowing costs, disruptions in financial markets, and potential harm to the country’s credit rating.
The current impasse has arisen due to the fact that the House of Representatives is controlled by the Republican party, and as such a vote in Congress to raise the debt ceiling will not happen unless the Democratic party agrees to certain demands.
Negotiations have been taking place between Speaker of the House of Representatives, Kevin McCarthy, and President Joe Biden in order to come to a deal that would see the debt ceiling raised for two years while imposing a cap on government spending. The Republicans have criticised the Democratic government for overspending and will not put forward a vote to raise the debt ceiling unless the government agrees to cut back on non-defence discretionary spending, according to Reuters. A potential deal is currently on the table and will be presented to Congress for a vote before the 01 June deadline.
BCA Research highlights two key points in this situation. Firstly, the Democrats are wary of making substantial spending cuts in the lead-up to the 2024 presidential elections. Secondly the Republicans could push for victory no matter what, on a gamble that pushing the US into a recession will result in an easy victory in 2024. Ultimately neither party can truly afford to risk a default and therefore, a negotiated deal will be reached. According to BCA research it is likely that the Republicans will back down from their demands, as even during the Trump administration government spending rose by 13%.

references:

Biden, McCarthy appear near two-year deal on US debt ceiling as default looms | Reuters

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