Due to the fact that only Congress has the authority to borrow money, the debt ceiling can only be increased by legislation raised by the House of Representatives. This means that negotiations with the president are not necessary to raise the debt ceiling, but have increasingly become a political bargaining tool, especially when Republicans have control of Congress alongside a Democratic president. While the U.S. has one of the highest debt to GDP ratios worldwide, the country has, thus far, maintained strong confidence in its ability to pay back its debts.
Historical context
Whenever the debt ceiling is reached, the U.S. Treasury employs “extraordinary measures” – accounting tools that curb certain investments so that the government can continue to keep paying its financial obligations for a limited amount of time. The debt ceiling has been raised many times since 1960 - 49 times under Republican presidents and 29 times under Democratic presidents. Historically, these raisings have happened without a debate, but are increasingly used as a way to force Democratic presidents to the negotiating table.In the U.S., the Republican Party has long styled itself as the party of low government spending and oversight. The party frequently criticize Democrats for perceived excessive spending and overreliance on government social programs to address societal issues. Though while it may be the case that Democratic Presidents have contributed to the deficit through social programs such as the Affordable Care Act, Republican leaders have equally contributed to government debt through other means like tax cuts. Additionally, global emergencies such as the 2008 financial crisis and COVID-19 pandemic have required increased governmental spending to protect the economy and the individuals within it.
The 2023 debt ceiling crisis
House Speaker Kevin McCarthy secured his position as Speaker of the House in 2023 by promising to fight for spending cuts, refusing to raise the debt ceiling without spending negotiations with President Biden. The party position remains that big Democratic spending has disproportionally raised the national debt and that reforms were needed before the debt ceiling can be increased again. Democrats responded to this by pointing to 2021, a year in which the Republican Party increased the debt ceiling without reforms under President Trump and have significantly contributed to the debt through unfunded tax cuts.In 2023, Republicans look for policy provisions such as work requirements to federal aid, reduced funding to the Internal Revenue Service (the tax collecting authority), repealing Biden’s student loan forgiveness program, as well as the current president’s landmark healthcare, tax and climate bill that passed in 2022. Much of these provisions are focused on nondefense discretionary spending which amounted to around 910 billion dollars of the total 6.21 trillion in total government outlays in 2022. Additionally, Republicans have proposed legislation to make the tax cuts implemented by President Trump permanent, which would further increase national debt. However, most economists agree that the current state of U.S. debt is not an economic crisis, rather, the crisis is the threat of not raising the debt limit.
The risk of default and its implications
The biggest risk cited in the case of the U.S. Treasury reaching the fiscal cliff in which its “extraordinary measures” could no longer sustain government payments on its debt is the risk of default. A default on government debt means that the government can no longer continue to pay for its financial commitments. This can have implications for paying for day-to-day operations, including the salaries of government workers, national defense, and funding entitlements such as Social Security. Given that the government is the third largest contributor to economic activity, this could have disastrous economic effects on U.S. businesses, individuals, and global financial markets.Economists have projected that a default on its debt would not only lead to a shrinking of the country’s gross domestic product, shortly after it recovered from the economic downturn of 2022, but it could also lead to millions of jobs lost. Reduced stock prices, increased treasury yields, mortgage rates, as well as other consumer and corporate borrowing are further implications associated with a default. Additionally, the Treasury could face a downgrade in its credit rating by credit rating agencies. This rating is thought of as an expression of how likely a credit rating agency believes the U.S. will pay back its debts. As of August 2023, the U.S. enjoys one of the highest credit ratings across agencies which allows it to borrow money at relatively low interest. A downgrade would increase the rate of interest, making it more expensive for the country to borrow money
