The current debt ceiling in the US is upwards of $31 trillion – and yet it is nearly being breached. As a result, it will likely be increased by lawmakers in the US so join us this week as we dive into the key things to look out for!
What is the Debt Ceiling
The debt ceiling in this context is the total amount of compounding debt for the US government. As a country, the US is a big spender and as Andrew points out, like any debt, national debt needs to be repaid. Usually people are chipping away at repaying their debts but with some pretty serious spending in the last couple of years and interest now accruing and compounding, there is a lot of money owing all around the world. COVID was a big reason why that debt figure has increased so much as there was a lot of stimulus provided which had to be borrowed in order to keep the economy afloat through lockdowns and business interruptions.
Why does the Debt Ceiling Matter?
The debt ceiling is such a major talking point for a couple of reasons. Firstly, Host Andrew Baxter points out that within the American Constitution is a specified provision for what is an acceptable amount of debt for the government to be owing. If the debt breaches that ceiling, Congress is then forced to take action to raise the debt ceiling so that it is breached. If the debt does in fact exceed that debt ceiling level and Congress does not take action to rectify it, the consequence would be a catastrophic shutdown of the economy. Government workers would not be paid and pretty much all core government activities would screech to a halt which would ultimately cause a major knock on effect to the rest of the economy.
Importantly also, an admission from the US that they are unable to service their debt in the future, as a global economic superpower, the rest of the world would have to be greatly concerned and the shockwaves would span across the entire world economy. Countries owed money by the US would be very concerned to hear they will not be receiving any remuneration and overall we would probably see some mass conflicts along with the major economic turmoil around the world. So the debt ceiling is definitely something we need to make sure we are on top of.
The Debt Ceiling in the Current Landscape
The increase to the debt ceiling is typically a mere formality, however the amount it is raised by is one that is open for debate in Congress. Host Andrew Baxter points out the current political landscape in the US with a small Republican majority up against a Democratic party mindful of the importance of policy in the lead up to the next election could lead to some interesting negotiations between the parties. The Republicans may be tempted to leverage the Democrats into adjusting some other policies in order to raise the debt ceiling by the desired level. Joe Biden has been active with Executive Order legislation and has the ability to override debt ceiling negotiations.
Possible Policy Changes
When a government is looking to repay some of its debt, there are a few strategies they may adopt to make that easier. Firstly is generally tax increases as more government revenue inherently gives them more money to repay their debts. This may include increases on general income but Host Andrew Baxter notes sometimes governments try to introduce some pretty radical taxes in order to shake the tree. One proposition in the US was even to tax unrealized profits on shares and other investments. This is very short-sighted as stock prices can then come down. And the holder can be left well out of pocket for supposed profits when they may in fact be in loss on a holding. Safe to say US Congress’ upcoming moves towards raising the debt ceiling will be interesting to follow.