What is the problem with the US debt ceiling?

What Is The Problem With The US Debt Ceiling?

Washington – The United States government reached its legal borrowing capacity limit of $31.38 trillion on Thursday, and the Treasury Department began implementing alternative solutions called “extraordinary measures” to avoid default.

Sounds disturbing, right?

But, take a deep breath. Technically, the phrase refers to a bunch of accounting solutions. Yes, accountants.

RELATED

Because the debt ceiling limits the issuance of government bonds — the way the United States borrows money — these solutions transfer funds between accounts and should keep the government running until at least June, according to a letter sent by the Treasury Secretary Janet Yellen last week.

In theory, President Joe Biden and Congress will use the extra time to reach an agreement to raise the country’s legal debt ceiling. These negotiations are often intense and down to the last second, with immense economic damage at stake. But there have been about 80 agreements to raise or suspend the debt ceiling since the 1960s.

What could be worrying is not the existence of extraordinary measures, but what happens if they run out in the middle of this year without an agreement being reached. Economists have warned that this could trigger a global financial crisis.

So far, House Speaker Kevin McCarthy and Biden are playing what could be a dangerous game of who can last the longest without blinking, with the largest economy on the planet caught in the middle.

Here are some questions and answers about the situation:

WHAT ARE EXTRAORDINARY MEASURES?

To keep the government running, the Treasury Department was carrying out a series of accounting maneuvers Thursday that would put a temporary suspension on payments to federal employees’ retirement, disability and health funds, giving the government enough financial headroom to manage your daily expenses until about June.

By suspending payments, the government can reduce the amount of outstanding debt. That allows the Treasury Department to continue financing government operations.

It is unknown what will happen if these extraordinary measures are exhausted without reaching an agreement on the debt ceiling. A prolonged default could be devastating, leading to falling markets and panic-fuelled layoffs if confidence in a cornerstone of the global economy: US Treasuries evaporates.

WHAT ALLOWS THE TREASURY TO USE THESE MEASURES?

There is no discussion here. Congress has given the Treasury Department the power to do so.

Because these are retirement accounts, no one is hurt by government notes. The funds will be restored in full once the suspension or increase in the debt ceiling is enacted. It’s not necessarily the measures that can hurt the economy, but doubts among consumers and businesses about whether lawmakers will increase the debt limit.

HOW BIG ARE THESE RETIREMENT FUNDS?

As of the end of fiscal year 2021, there were $986 billion in net assets in civil service and federal employee retirement funds, according to a report from the Office of Personnel Management. Required government contributions to the funds are large enough for these extraordinary measures to last for nearly five months.

HOW COMMON IS THIS?

“Treasury Departments in every administration in the last few decades have used these extraordinary measures when necessary,” Yellen wrote in her letter.

The measures were first used in 1985 and have been used at least 16 times since then, according to the Commission for a Responsible Federal Budget, a fiscal watchdog.

WHY DO YOU HAVE A DEBT LIMIT?

Before World War I, Congress needed to approve the issue of each bond. The debt limit was created as a solution to finance war activities without the need for a constant series of votes.

Since then, a tool created to make government work easier has become a source of dysfunction, stoking partisan warfare and creating economic risks as debt has grown for the past 20 years.

HOW RISKY IS THIS POLITICS ON THIS OCCASION?

It looks alarming, and it’s hard to see how Biden, McCarthy and the Democratic-controlled Senate can find common ground. A default could result in the loss of millions of jobs, a deep recession that would have global implications and, ironically, higher interest rates that would complicate managing the federal debt.

McCarthy said Tuesday that negotiations over possible budget cuts that Republicans are seeking in exchange for raising the debt ceiling should begin immediately, even as the Biden administration has likened such a demand to holding the US economy hostage. .

“Who wants to put the country under some kind of threat at the last minute of the debt limit?” McCarthy asked. “Nobody wants that. That’s why we’re asking, ‘Let’s change our behavior right now. Let’s negotiate'”.

The Biden administration wants the debt ceiling increased without any pre-existing conditions.

White House press secretary Karine Jean-Pierre, asked twice Wednesday if there was evidence that House Republicans can ensure the government would avoid default, said they have a “constitutional responsibility ” to protect all faith in America and its credit. She did not indicate whether the White House saw any indication that defaulting is completely unacceptable.

DO DEBT LIMIT CONFRONTATIONS HELP REDUCE GOVERNMENT DEBT?

Not much.

The Congressional Budget Office (CBO) estimates that annual budget deficits will grow from nearly $1 trillion to more than $2 trillion in the next 10 years.

The mismatch in the coming years increasingly reflects government spending on programs like Medicare and Social Security that is outpacing tax revenue. That suggests that the government will need to severely cut spending, apply big tax increases, or a combination of both.

In 2011, when Barack Obama was president and Biden vice president, a bipartisan agreement was reached to raise the debt limit by $900 billion in exchange for automatic spending cuts of $917 billion over the next 10 years.

But debt reduction never fully materialized.

After Donald Trump took office in 2017, Republican lawmakers pushed further increases in debt by passing deficit-financed tax cuts. Debt accelerated further with the onset of the coronavirus pandemic in 2020, which caused massive government borrowing to pull the country out of a deep recession.

The CBO estimated last year that the federal debt would exceed $40 trillion by 2032.

READ MORE NEWS

YOU MAY ALSO LIKE

Leave a Reply

Your email address will not be published. Required fields are marked *

+ 55 = 60