The US House of Representatives passed a bill, narrowly at it, to raise the government’s debt limit.
The bill, passed on Wednesday by a 217-215 vote, proposes to increase the borrowing limit by $1.5 trillion or until March 31, 2024, whichever comes first.
The bill will now reach the US Senate, where it is expected to face serious pushback from the Democrats, who hold a slight majority over the Republicans.
The Democrats aren’t happy with the latest version of the bill as they want the debt limit to rise without any cut in welfare spending.
The bill approved by the House of Representatives will also reduce spending to 2022 levels, cap annual growth at one per cent, eliminate renewable energy tax breaks and tighten work requirements for anti-poverty programmes.
While Speaker of the House Kevin McCarthy, a Republican, seeks talks with President Joe Biden for the bill’s smooth passage, the latter is likely to use his veto power to reject the proposal.
That would, however, not be good news for the United States as the Treasury Department may run out of methods to pay its obligations and will begin defaulting between July and September, as per various estimates.
Keeping politics aside, debt limit or debt ceiling is a concept of fiscal discipline. However, the frequent changes to the limit, especially in the last decade, also puts a question mark on the concept itself.
The Treasury Department defines its debt limit as “the total amount of money that the United States government is authorised to borrow to meet its existing legal obligations.”
The “legal obligations” referred to by the department include funding for Social Security and Medicare benefits, military salaries, interest on the national debt, tax refunds, and other payments.
While the debt limit is tied to the total national debt of the United States, it has a complicated relationship with the US budgeting process.
Technically speaking, the debt limit is a strict reminder about paying up the past obligations of the government. However, the US federal spending – future expenditure – has a separate legislative process, which has little to do with the debt limit.
However, lawmakers cutting across party lines in the US have sought major cuts in federal spending while negotiating for a suspension or raise in the debt limit.
The current debt ceiling is $31.4 trillion, which the United States hit in January. The country will default on its payments once the Treasury Department runs out of “extraordinary measures” to fund its obligations.
Strictly speaking, the United States has hit the debt ceiling several times in the past too. Yet, it has never defaulted on its payments as Congress ultimately increases or temporarily suspends the debt limit, allowing the government to borrow more.
But the US defaulting on its debt may have unprecedented consequences.
This is what the Treasury Department has to say about such a scenario: “The scope of the negative repercussions related to a default are unknown but would likely have catastrophic repercussions in the United States and in markets across the globe.”
One great possibility arising from a debt default is the downgrade in the credit ratings of US sovereign debt.
In August 2011, while the country avoided defaulting by raising the debt limit, credit rating agency Standard & Poor reduced the United States’ rating from AAA (outstanding) to AA+ (excellent).
Any downgrade in credit ratings sends negative signals about economic health and raises concerns regarding a country’s ability to repay its debts.
More recently, Goldman Sachs economists estimated that a debt ceiling breach would immediately halt about one-tenth of US economic activity.
The history of debt limits
The concept of a debt ceiling or limit dates back to the early 20th Century, to be precise to 1917 when the US entered the first world war.
Until then, the US was an isolationist in international affairs and needed funds to bolster its war efforts. Consequently, Congress legislated the Second Liberty Bond Act in 1917, which sought public funds through bonds and also created the debt ceiling.
However, it was only in 1939 and 1941, amid the second world war, that the debt ceiling, as we know it today, was substantially established. The Public Debt Acts of 1939 and 1941 put an aggregate limit to nearly all federal debt.
Since 1960, the US Congress has raised or temporarily suspended the debt limit at least 78 times — 49 times under a Republican administration and 29 times while Democrats have been in power.
The US debt limit has risen dramatically in the last decade, owing to the fallout of the 2007-08 financial crisis and the consequent global recession.
Since 2010, the debt limit has risen by over $17 trillion, from $14.2 trillion in February 2010 to $31.4 trillion in December 2021.
Given the ballooning debt burden, many analysts feel that the concept of debt limit has failed. Some have even suggested that the US must do away with the debt limit, calling it “harmful” to the US economy.
Roger Ferguson, a senior fellow at the Centre for Foreign Relations, argues that the US Congress should eliminate the debt ceiling completely or at least tie it to federal spending.
“It is time for the United States to leave behind this antiquated mechanism that brings the country to the precipice of default every few years,” the US think tank quoted him as saying.
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