Biden pulls out of Quad summit: What is the US debt ceiling deal, over which lawmakers are sparring?

Biden was previously supposed to attend the Quad summit – alongside Japan’s Fumio Kishida, Australia’s Anthony Albanese, and India’s Narendra Modi – in Sydney next week, but has cancelled his trip because of debt ceiling negotiations in Washington.

What is the debt ceiling?

Simply put, the “debt ceiling” or “debt limit” is the maximum amount of debt the federal government is allowed to accumulate in order to fulfil its financial obligations.

The government typically spends more than it earns. This means that it needs to borrow in order to pay for things like social security, Medicare, military and other salaries, interest on the national debt, tax refunds, etc.

The debt limit was introduced in 1917 – when the US entered World War I – and according to the US Treasury Department, the Congress has increased or suspended the debt limit 78 times since 1960. As of 2023, the debt ceiling stands at $ 31.4 trillion.

Why is there a fight over the debt ceiling now?

Constitutionally, the Congress controls the government’s purse strings. The debt ceiling was introduced in order to make it easier for the executive to operate without having to turn to the Congress every time it wants to spend – it allowed the government to borrow as required as long as it kept under the debt limit, which has to be approved by the Congress.

This makes the debt limit a prime issue in the evergoing push-and-pull between the executive and the legislature. This is further exacerbated in a highly polarised political climate in the US where the executive and the legislature are not ideologically aligned.

On one hand is Democratic President Joe Biden who would want to raise the debt ceiling in order to fulfil the many (expensive) promises he made during his campaign. On the other hand, are Republicans who hold a majority in the House of Representatives. Not only are they ideologically fiscal conservatives, not raising the debt ceiling/ not raising it as much as Biden wants gives them political benefits of scuppering the president’s agenda.

President Joe Biden gives a thumbs up after delivering remarks on the debt ceiling in the Roosevelt Room of the White House, Wednesday, May 17, 2023, in Washington. Biden has insisted that a deal will get inked soon. (AP Photo/Evan Vucci)

Furthermore, given the dire consequences of not raising the debt ceiling, Republican lawmakers have also attached extraneous priorities to the bill. For instance, current Republican proposals to increase the debt limit include major spending curbs on the government.

“Nobody should use default as a hostage,” Senate Majority Leader Chuck Schumer (D-NY) on Tuesday. “The consequences would be devastating for America,” Schumer added.

But what would these consequences be?

If the debt ceiling is breached, the Treasury Department would be unable to make payments when they are due – meaning that the US would enter into a default for the first time in its history.

“Failure to meet the government’s obligations would cause irreparable harm to the US economy, the livelihoods of all Americans, and global financial stability,” Treasury Secretary Yellen has said.

Once the debt default happens, analysts say that the dollar would weaken, the stock markets would collapse, and thousands of people might lose their jobs. Simply put, a default is likely to be catastrophic for the global economy – exactly why Republicans are using it as a bargaining chip against Biden.

Furthermore, any default would also downgrade the US’s credit rating – meaning investors would “demand much higher interest rates in the future to loan money to the government”, according to the report in NYT.

Has the US seen such a crisis in the past?

According to experts, today’s crisis is similar to what happened in 2011 when Barack Obama (Dem) was president but the House of Representatives was controlled by Republicans. Back then, the crisis ended just hours before the deadline, only after the Obama administration agreed to spending cuts worth more than $ 900 billion.

This time, Biden faces a similar challenge and with the political divide deeper than ever before, observers see the fight going down to the wire.

Is there any alternative to this system?

Most experts agree the current debt limit process isn’t working.

“The debt ceiling is a terrible way to try to impose fiscal responsibility,” Maya MacGuineas, the president of the Committee for a Responsible Federal Budget, told NPR. “It doesn’t make sense. It says after you vote to borrow a lot of money then you will then vote whether to actually make good on those bills. That’s a dumb approach.”

Instead, she has suggested a system where Congress agrees to increase the debt limit every time it passes legislation.

Others have suggested abolishing the debt limit entirely.

“The debt ceiling has not had a disciplinary effect on the budget,” economist Louise Sheiner told NPR. “It really is used more, I think, as a political football than as a really intentional way of addressing our long-term challenges.”

Sheiner argues that while cutting spending is understandable in theory, the current system does not allow meaningful and deliberative discussion on key issues. “All you’re doing is sort of holding the economy hostage and saying, if I don’t get my way, whatever that is, then you know, I’m going to let the U.S. government default on its obligations,” Sheiner argues.