Do the debt ceiling dance

Alex Dunnin

It’s on again. The world’s biggest economy is again running out money and has to urgently pass legislation to increase its debt ceiling. This would the 90th time since 1959.

In that time there has been 13 presidents who raised the debt ceiling on average at least once a year. And before partisan critics start espousing myths about which US political party is the better fiscal manager, 60% of debt ceiling increases were authorised by Republican presidents and only 40% by Democrat presidents.

While for most nations it seems bizarre to fight over national debt ceilings, in the US, new government borrowings must be authorised by a vote of the Congress.

The debt ceiling, or limit, is the total amount of money that the US government is allowed to borrow to meet its existing legal obligations, including social security and Medicare benefits, military salaries, interest on the national debt, tax refunds, and other payments.

It does not authorise new spending, instead it simply allows the government to pay for existing obligations that Congresses and Presidents of both parties have already made.

“Failing to increase the debt limit would have catastrophic economic consequences. It would cause the government to default on its legal obligations – an unprecedented event in American history. That would precipitate another financial crisis and threaten the jobs and savings of everyday Americans – putting the United States right back in a deep economic hole, just as the country is recovering from the recent recession,” explained the US Treasury.

Put bluntly, just as the US economy, and other developed nations economies, are showing signs of optimism as inflation comes under control and investors are beginning to recover their confidence, the fear is that if Congress doesn’t authorise the debt ceiling increase that capital markets globally could take a beating plunging the world’s financial system into deep recession.

In normal times it would be a no-brainer that Congress would wave-through this latest debt ceiling increase, or at least authorise it after going through some limited theatrics.

But the US Congress house of representatives is on a knife-edge following the 2022 mid-term elections that were a disaster for the Republicans. Just a few weeks ago it took House Speaker, the conservative Republican Kevin McCarthy, a record 15 votes to just get over the line with a wafer-thin majority.

The political problem is not that the Congress will split on party lines on this issue, but that the Republicans might implode and even throw their Speaker out. As a result, there are grave concerns the ginger group of extremist Republicans that complicated McCarthy’s election to the Speakership could hold Congress to ransom.

At the start of 2023, US government debt and the debt ceiling stood at US$31 trillion. fs