The US Debt Ceiling in 2023: A Tool to Encourage Fiscal Responsibility or to Facilitate Political Bargaining?
America’s system of legislative checks and balances empowers Congress to rein in potentially reckless federal government borrowing. Most recently, Republican Congressmen have withheld their support for the Biden administration as it seeks to raise the national debt ceiling of $31.38 trillion- set by Congress on 15 December 2021, signed into law the day after, and exceeded in late January this year. The growth of national debt in the US has been driven in recent years by recurring annual deficits, which were massively increased by the federal government’s economic stimulus programmes in the wake of the COVID-19 pandemic. US Treasury Secretary Janet Yellen has seen it fit to set a deadline of 5 June 2023, by which date a failure of bipartisan consensus to raise the debt limit would lead to the federal government to default on its existing legal obligations, as approved by both chambers of Congress. In other words, the US government would no longer be able to pay its bills on time. According to the US Treasury, these bills include “Social Security and Medicare benefits, military salaries, interest on the national debt, tax refunds, and other payments”.
The debt ceiling is, at best, a shifting goalpost, frequently raised by both Democratic and Republican Presidents, sometimes with unconditional bipartisan Congressional support. However, it has occasionally been used as a bargaining tool to push ideological agendas in an increasingly polarised political landscape, leading to brinkmanship in Congress and unwelcome government shutdowns. The ceiling does not support any new spending, but merely caps borrowing to repay existing expenditure instead. The debt limit covers debt held by domestic and foreign investors as Treasury securities, at varying interest rates and maturities, and traded on capital markets, and debt held by federal government accounts which is not traded on those markets.
The debt ceiling is a statutory limit on US Treasury debt, set by Congress and dating back to the Second Liberty Bond Act 1917. This wartime law authorised the Treasury to issue long-term Liberty bonds without Congressional approval, providing the debt stayed within a statutory debt ceiling set at $11.5 billion. In 1939, Congress established an aggregate limit of $45 billion on government debt, accounting for all kinds of financial instruments issued under the authority of the Second Liberty Loan Act 1917, such as Treasury bonds, bills, notes, and securities. Rapidly mounting wartime debt led to the passage of Public Debt Acts in 1939 and 1941- then amended each year until 1946. The debt ceiling peaked at $300 billion before being lowered to $275 billion in June 1946. The costs of the Korean War required the debt ceiling to be raised once again in 1954. Since then, the debt ceiling has continued to increase, being raised 74 times from March 1962 to May 2011. In 2011, President Obama was forced by his Republican opponents to renegotiate the debt limit and to cap government spending, following a standoff, the threat of a debt default, and the downgrading of its US credit rating by Standard & Poor’s AAA to AA+-for the first and only time.
The Republicans are seeking many concessions before they agree to raise the debt ceiling in 2023. Their demands include increased military spending, a cap on discretionary spending, cuts in proposed funding for the Inland Revenue Service, reapportionment of COVID-19 funds, and a relaxation of permits for fossil fuel energy projects. Most of the federal budget provides mandatory funding for entitlement programmes (Social Security, Medicare, Medicaid, SNAP, TANF). Republicans seek to restrict eligibility for such programmes, through new or enhanced work requirements. Republican legislators also require government spending in 2024 to be cut back to 2022 levels, and to be capped at 1 per cent annual growth for 2025.
The question is what is likely to happen if Congress and the White House do not agree and and the debt ceiling is consequently not raised. The resulting caps on government borrowing will mean that the federal government may have to make up the shortfall by cutting spending, raising tax revenue (higher taxes for high earners, green energy tax credits, abolition of tax reliefs), or both. Insufficient funding for federal agencies and programmes will precipitate a government shutdown that compromises discretionary, “non-essential” services, while seeking to protect essential services (law enforcement, border protection, power grid maintenance, and air traffic control). There is a possibility that the debt ceiling is suspended, which has happened on seven occasions since 2013. Finally, if the government elects to default on its obligations to creditors and citizens, which has never happened before, investors are likely to lose confidence in the creditworthiness of US assets and chose to sell off their holdings in US Treasury bonds. A lower demand for Treasuries will weaken the US dollar and increase the cost of sovereign debts of low-income countries that are denominated in other currencies, relative to the global reserve currency. The US will inevitably be downgraded by the credit rating agencies. Rising interest rates will increase short-term borrowing costs for households and businesses. National GDP will fall, and massive job losses follow.
It seems most likely that some form of compromise will be reached, thereby averting government shutdown and the threat of recession in the US. In the longer term, rising national debt and a high debt-to-GDP ratio-second only to Japan among major industrialised countries-will require economic policy to be better aligned with both societal needs and political imperatives if the US economy is to avoid falling into a trap of unsustainable debt. At the same time, the precise benefits of a debt ceiling remain unclear and may conflict with the wording of the Fourteenth Amendment of the US Constitution. Finally, some economists even believe that the US economy can withstand rising debt for years to come without suffering the consequences, making the need for such a tool somewhat questionable.
Ashis Banerjee