US stares at default: What is the debt ceiling crisis, and its likely fallout

Currently, this limit is at $31.4 trillion. The Republicans, who have a majority in the House, are refusing to raise it unless the Democrat-run government agrees to their demands, which include a significant cut in spending.

The debt limit was introduced in 1917, when the US entered World War I. Constitutionally, 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 Congress every time it wanted to spend — it allowed the government to borrow as required as long as it kept under the debt limit approved by Congress.

According to the Treasury Department website, since 1960, “Congress has acted 78 separate times to permanently raise, temporarily extend, or revise the definition of the debt limit — 49 times under Republican presidents and 29 times under Democratic presidents.” The most recent raising was in 2021.

What happens if the govt defaults?

Since this has never happened, no one has the exact answer. However, the consequences could be catastrophic. The issue was serious enough for Biden to cancel his scheduled visit to Papua New Guinea on Monday — which would have made him the first US President to visit a Pacific Island nation — at a time when the US is focusing on the region to counter China.

The government would no longer have the money to function, and would have to decide who gets salaries, and how much. Yellen, in a letter to McCarthy on May 22, said, “If Congress fails to increase the debt limit, it would cause severe hardship to American families, harm our global leadership position, and raise questions about our ability to defend our national security interests.”

Analysts say the dollar would weaken, the stock markets would collapse, and millions might lose their jobs. Also, the US’s credit rating would be downgraded, making future borrowing more expensive.

The crisis in the US will have wider repercussions. The Associated Press quoted Mark Zandi, chief economist at Moody’s Analytics, as saying that “No corner of the global economy will be spared” if the US government were to default.

What do the Republicans want?

Biden wants to raise the debt ceiling in order to fulfil the many promises he made during his campaign. Republicans want to thwart some of Biden’s key plans, such as writing off student debt. But even keeping immediate political goals aside, the Republicans are ideologically fiscal conservatives, while Democrats believe the government should spend more on social welfare schemes.

To agree to raising the debt ceiling, the Republicans have demanded that spending be kept at 2022 levels in the next financial year, and subsequent increases capped at 1% for some years. The Democrats say the spending should be kept at 2023 levels. Biden has proposed shoring up revenue by taxing the rich more and closing tax loopholes for the oil and pharmaceutical industries. McCarthy has not agreed to the tax increase.

Does Biden have any other way?

Technically, the US President can sidestep Congress by invoking the 14th Amendment, whose Section Four states that the “validity of the public debt of the United States … shall not be questioned.” But if Biden were to use this option, it could trigger lawsuits, and he has seemed to prefer the Congressional route.

Has anything similar happened earlier?

The crisis is similar to what happened in 2011 when Barack Obama 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.

Yellen, in her letter to McCarthy, underlined, “We have learned from past debt limit impasses that waiting until the last minute to suspend or increase the debt limit can cause serious harm to business and consumer confidence, raise short- term borrowing costs for taxpayers, and negatively impact the credit rating of the United States.”

Is there an alternative?

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.”