What is US Debt Ceiling and what it means for the US economy

US Debt Ceiling

From the last few years, you might have heard of a few scary predictions such as “The US debt ceiling may not be raised” or “USA may stop paying its bills completely”. Fortunately for the world, nothing of such has happened yet, however, it is important to understand what exactly the debt ceiling is, how it is determined, and why it is so important that not only the USA but the world is worried about it. 

We have to understand that the United States Debt ceiling is a crucial aspect of the country’s financial system and plays an important role in its economic stability. The debt ceiling represents the maximum amount of debt that the US government can legally borrow to meet its financial obligations. 

The debt ceiling is set by the US Congress and serves as a limit on the total amount of outstanding debt that the government can accommodate. 

Let’s discuss in detail the debt ceiling and why it is important. 

What is the Debt Ceiling?

The US debt ceiling refers to a legal limit set by the United States Congress on the total amount of debt that the federal government can accumulate. It represents the maximum level of outstanding debt that the US Treasury Department can issue to fund government expenditure. 

Since the USA spends more than it earns, it needs to borrow to narrow down the gap, and considering the size of the US economy and its $25 trillion GDP, the size of the spending and borrowings is obviously multiple of the other countries. 

The debt ceiling was hit by the US government on 19th January 2023 and now it has reached a stage when it needs this debt ceiling revised upwards to enable the government to continue paying its bills at the correct time. 

Usually, when the debt ceiling is reached, the Federal government uses “Extraordinary measures” to ensure that the regular bills are paid on time. 

What will happen once the Debt Ceiling is Hit?

Firstly, if the debt ceiling hits, the government cannot seek higher borrowing limits. Government starts using other measures such as curbing capital investments so that the routine expenses can be paid and only once that option is exhausted, the government tries to seek approval for the enhancement of the debt ceiling. 

Such extraordinary measures can help the government to pay the bills for only a few months but once the cash runs out, the government needs to get a higher debt ceiling approved and in the absence of such approvals, the government cannot issue new debt to pay its bills. 

As a result, the government can end up defaulting on its own debt if it is unable to make the required payments to its bondholders. Such a scenario is not only catastrophic for the US economy but also will have adverse effects on the global economy. 

What Does Raising the Debt ceiling mean?

The raising of the debt ceiling is often directed at signaling that the government can spend more. The raising of the debt ceiling does not authorize any fresh spending, and that is something that the US Congress must authorize under the Constitution. 

The debt limit concept was first proposed in the 20th century with the intention of ensuring that the Treasury does not need to request approval but is instead given unconditional approval up until the limit is breached. 

The debt ceiling only authorizes spending money on programs that are already approved, so the idea of spending cuts may not be too valid as that is not the intent of the US debt ceiling anyway. 

It has been 5 months since the debt ceiling was breached, and since then, the US government has been surviving on extraordinary measures that meet expenses. 

How much debt does the United States of America have, and what does it mean? 

The national debt of the country crosses $31 trillion in the year 2022 and the borrowing cap is set at $31.381 trillion US dollars unfortunately, that level was breached in January 2023 itself. Since then, the government has taken extraordinary measures to run the government, but it has been declared that they cannot continue running it after the month of June. 

The concept of a debt ceiling was introduced as an emergency policy measure during World War II. The debt ceiling was introduced as a convenient measure so that the treasury does not have to seek approval each time. 

Let us assume that if the concept of debt ceiling loses its meaning, it is entirely likely that it would lose its value and it will be abolished. For now, US debt is a concern for not only the US government but the world government as well as the debt is so large that it has the power to rattle the world economy, even with a minor gyration. 

In summary, the US debt ceiling serves as a critical mechanism for controlling government spending, safeguarding the nation’s creditworthiness, and ensuring fiscal responsibility. It plays a very important role in maintaining economic stability and managing the country’s debt levels. Understanding the importance of the debt ceiling is crucial for economists, policymakers, and citizens alike.