Debt ceiling is the legal limit on how much money the federal government can borrow to pay its bills. It covers spending that Congress has already authorized, such as Social Security benefits, military salaries, interest on the national debt and more. The debt ceiling does not authorize new spending; it only allows the government to pay for what it has already agreed to spend.
If the debt ceiling is not raised, the government will run out of money to pay its bills, which could have serious consequences for the economy and the financial markets. The government would have to prioritize some payments over others, such as interest on the debt, Social Security benefits, or military salaries.
This could cause delays or defaults on some obligations, which could damage the credit rating of the US and increase borrowing costs. It could also trigger a recession, as government spending is a major component of the GDP.
Tekedia Mini-MBA edition 14 (June 3 – Sept 2, 2024) begins registrations; get massive discounts with early registration here.
Tekedia AI in Business Masterclass opens registrations here.
Join Tekedia Capital Syndicate and invest in Africa’s finest startups here.
The US government has been operating under a temporary suspension of the debt ceiling since August 2019. That suspension expired on July 31, 2023, and since then, the Treasury Department has been using extraordinary measures to keep paying the bills without exceeding the limit.
However, those measures were expected to run out by Monday, according to Treasury Secretary Janet Yellen. If that happened, the US would have faced a default on its obligations for the first time in history, which could have triggered a financial crisis and a recession.
After months of partisan deadlock, President Biden and House Speaker Kevin McCarthy reached a deal, to raise the debt ceiling by $480 billion, enough to cover the government’s borrowing needs until early December 2024. The deal also included a two-year budget agreement that set spending caps for defense and nondefense programs, as well as some provisions to reduce spending and increase revenues.
The House passed the bill last year by a vote of 271-165, with 50 Republicans joining 221 Democrats in support. The Senate followed suit by a vote of 63-36, with 17 Republicans joining 46 Democrats in support.
Implications of the bill
The bill will allow the US government to avoid a default and continue paying its bills until early December 2024. It will also provide some fiscal certainty for the next two years by setting spending levels for defense and nondefense programs. However, it will not resolve the underlying issue of the debt ceiling, which will likely resurface again in December when the new limit is reached.
Moreover, it will not address the long-term challenges of reducing the national debt and balancing the budget, which will require bipartisan cooperation and hard choices on spending and taxes. The bill will allow the US to pay its existing debts and avoid a default that would have severe economic consequences.
The debt ceiling has been raised 78 times since 1960, most recently in August 2019. However, it is often a source of political conflict, as some lawmakers use it as a leverage to demand spending cuts or policy changes from the administration. This creates uncertainty and instability for the government and the economy and increases the risk of a default or a shutdown.
The bill will also set spending limits for defense and nondefense programs, with some adjustments for Covid relief funds, IRS funding and energy projects. The bill will resume federal student loan payments, impose work requirements for some welfare recipients, and extend the debt ceiling until after the 2024 presidential election.