The U.S. reached its $31.4 trillion debt ceiling in January, which prevented the federal government from amassing additional debt (or borrowing more money) until it was lifted or suspended. President Biden and the House Republicans have now achieved an agreement to lift the debt ceiling and reduce spending after weeks of negotiations. On Thursday evening, the Senate voted 63 to 36 to pass the law.
The debt ceiling agreement: How will it impact you? Let’s peel back the layers of this complicated query. What you should know is as follows.
How much debt can you have?
The debt ceiling, which Congress established in 1917, sets a limit on how much money the country can borrow to pay for past-due legal commitments (such as social security, tax refunds, military salaries, interest on outstanding debt, Medicare benefits, and other things). It limits how much debt the United States can accumulate. The $31.4 trillion debt ceiling in effect right now.
How does reaching the debt ceiling affect you?
If the nation’s income exceeded its expenses, the debt ceiling limit wouldn’t be a hot topic (the government receives funding from a variety of sources, including individual and corporate taxes, the leasing of land and buildings owned by the government, the sale of natural resources, and fees for entry to national parks).
The United States hasn’t had a surplus since 2001, therefore for more than 20 years, the government has had to borrow money to pay its bills. The United States had two choices after reaching its debt ceiling: either raise or suspend it to allow the government to make its payments on schedule, or risk default.
Increasing the amount that the United States can borrow would be the same as raising the debt ceiling. When the debt ceiling is suspended, the Treasury is given a temporary pass to borrow money above the previously allowed amount. If the United States went into default, it would be unable to make its debt payments on time, and the effects on the economy would probably be noticed right away.
When could the debt ceiling be raised or suspended?
Congress was informed by Treasury Secretary Janet Yellen in May that the United States will run out of money on June 5 to meet its financial obligations.
In a letter to House Speaker Kevin McCarthy dated May 26, Yellen stated, “We now estimate that Treasury will have insufficient resources to satisfy the government’s obligations if Congress has not raised or suspended the debt limit by June 5.”
Fortunately, Biden and the House Republicans were able to come to an agreement quickly.
Has a compromise been reached on raising or postponing the debt ceiling?
McCarthy and House Republicans were pushing for $3.6 trillion in cuts and caps on future spending for specific programmes in exchange for raising the debt ceiling, while the Biden administration was focused on raising the limit and paying bills on time before it agrees to any cuts. After weeks of conflicting stances, McCarthy and the Biden administration negotiated a deal to avoid a federal default.
On Wednesday, the House voted 314-117 to support the plan, which would suspend the debt ceiling for two years in exchange for $1.5 trillion in budget cuts. The law was subsequently sent to the Senate, where it was approved on Thursday by a vote of 63 to 36.
According to the New York Times, Biden praised the decision, saying, “Tonight, senators from both parties voted to protect the hard-earned economic progress we have made and prevent a first-ever default by the United States.” Nobody ever gets all they want during negotiations, but there is no denying that this bipartisan deal is a significant victory for the American people and our economy.
How does the debt ceiling bill work?
Because of the debt ceiling agreement, the country’s debt is suspended for two years, or until January 2025, allowing it to borrow money above the present debt ceiling to meet its financial obligations. The agreement also asks for $1.5 trillion in federal budget reductions over the following ten years.
Additionally, for the 2024 fiscal year, there will be a two-year limit on spending increase in non-defense discretionary programmes such domestic law enforcement, forest management, and scientific research. One of the largest spending reductions will be in IRS funding, where $20 billion would be redirected and $1.38 billion would be immediately cancelled if the agreement is approved.
Additionally, the Covid relief bill’s unused money will be reduced, some of which will
If the US had defaulted, what would have happened?
Mark Zandi, chief economist of Moody Analytics, issued a dire warning in March, stating that a default by the United States would be “catastrophic” and possibly leave Americans footing the bill “for generations.”
Government employees and companies with contracts from the government, for instance, may not be paid on time, and social security benefits may cease. Additionally, it would result in “a loss of consumer and business confidence,” according to Wendy Edelberg and Louise Sheiner of the Brookings Institution.
According to Harry Mamaysky, a professional practise professor at Columbia Business School, the government has “lots of obligations to lots of people.”
When there isn’t enough money, Mamaysky added, “they have to start prioritising who to pay first.” “Someone is not going to get paid the money they’re owed on time, and that’s going to be disruptive.”
The long-term effects of default, or what Mamaysky refers to as a “reputational issue,” which might cast doubt on the U.S.’s reliability as a wise country to do business with, could be even more detrimental than the short-term effects.
The biggest danger, according to him, is whether or not the United States would be regarded as the best country in the world to conduct business in five to ten years. It’s not imminent, but if Congress doesn’t keep an eye on it, confidence will be lost.
The U.S.’s existing “AAA” rating was placed under “rating watch negative” in May by leading credit rating agency Finch, indicating that the country’s pristine score could be threatened by a downgrade.
The company stated that despite the rapidly approaching x date (when the U.S. Treasury exhausts its cash position and capacity for extraordinary measures without incurring new debt), “the Rating Watch Negative reflects increased political partisanship that is impeding reaching a resolution to raise or suspend the debt limit.”
How will small businesses be impacted by a default?
According to a recent Goldman Sachs analysis, 65% of small business owners would be “negatively impacted” if the United States defaulted on its debt. Additionally, 90% of respondents deemed it “very important” for the government to avoid defaulting.
“If you’re a social security recipient and you owe rent, you might not have the money to pay rent,” Mamaysky continued. And if the landlord is responsible for paying the building’s utility bill, they might not be able to do so because they didn’t get the rent.
Additionally, according to a 2011 Federal Reserve of New York assessment, small businesses were the ones who suffered the most from the 2008–2009 crisis.
In a downturn, banks reportedly become “more selective and risk-averse” in their loan decisions, making it more challenging for people to obtain a small business loan.
Small businesses, which depend more on outside funding and are often riskier, are more likely to be impacted by a credit crunch, according to academics.
How frequently is the debt ceiling raised or altered?
It is a rather common practise for the U.S. government, notwithstanding the pressure that is currently being applied to increase or suspend the debt ceiling. According to the Treasury, Congress has taken action to increase, temporarily extend, or modify the debt limit 78 times since 1960—49 times under Republican presidents and 29 times under Democratic presidents. The Treasury also stated that “Congressional leaders in both parties have recognised that this is necessary.”
The debt ceiling was most recently raised in 2021, when it was increased by $2.5 trillion.
What does the debt ceiling have to do with the 14th Amendment and what does it mean?
Equal protection is covered under the 14th Amendment, along with other rights including citizenship, state taxation, and Congressional regulatory authority. The “validity of the public debt of the United States… shall not be questioned,” according to the Fourth Amendment’s clause on public debt.
There is a claim that Biden has the legal authority to invoke the 14th Amendment in order to circumvent Congress (which must approve any action to raise or suspend the debt ceiling) and effectively continue to issue new debt through the Treasury while disregarding the debt limit given that the United States has reached its debt ceiling and may not be able to pay its bills.
Biden was in favour of using the 14th Amendment as a remedy but was hesitant.
The point is: Could it be done and triggered in a timely manner so that it would not be appealed, and as a result past the date in question, and yet result in a debt default? According to The Wall Street Journal, Biden said to reporters on Sunday, “That is a matter that I think remains unsolved.
The action, according to some experts, would be unconstitutional.
According to Philip Wallach, a senior fellow at the center-right think tank American Enterprise Institute, “the Biden administration’s fidelity to the Constitution is really suggested by the administration’s even flirting with these ideas or opportunistic.”
Others were a little more blunt in their assessment of the proposal; Yellen warned that it might lead to a “constitutional crisis,” and Representative Chip Roy predicted that the House Republicans would “blow stuff up” if Biden chose to invoke the 14th Amendment.
