Home world What is the US debt ceiling and why does it matter that lawmakers have reached a deal?

What is the US debt ceiling and why does it matter that lawmakers have reached a deal?

What is the US debt ceiling and why does it matter that lawmakers have reached a deal?

Shares inched higher worldwide on Thursday after US lawmakers in the House of Representatives passed a new bill on the country’s debt ceiling.

The bill, which suspends the ceiling, passed with both Democrats and Republicans supporting it, and will head to the US Senate for the final approval.

The House – which is Republican controlled – had widely been seen as the bigger hurdle out of the two bodies of Congress.

But what is the debt ceiling, and what might have happened if the US had hit it? Below are answers to some common questions.

– What is the debt ceiling rule?

The US introduced the debt limit in 1917 at what today looks like a tiny $11.5 billion.

At the time, they set it up to make the process of borrowing money easier – until then Congress had to pass new legislation to approve all borrowing.

By instead putting a limit on borrowing, it allowed the executive branch of the government more flexibility in what and when it borrowed, so long as it did not borrow more than the ceiling.

– What is the debt ceiling now?

The ceiling has been raised many times over the past century since it was introduced – taking it to $31.4 trillion.

Historically this largely happened without much drama – after all Congress gets to vote on the government’s spending during the budget negotiations.

But from the mid-1990s the US Republicans have on several occasions used the debt ceiling as leverage to pressure Democratic Presidents into making changes to its spending.

– What did the June 1st deadline mean?

The Treasury had originally set a June 1st deadline to raise or suspend the debt ceiling, but last week extended it until next Monday.

This deadline is not as inflexible as it might first seem. Instead, it is more like an estimate of when the US might hit up against the ceiling.

The debt limit was increased by $2.5 trillion in 2021 to a little under $31.4 trillion, but by January this year US Treasury Secretary Janet Yellen said that the government was set to reach that limit.

She has since taken measures to make the money last as long as possible, using different tools to avoid a default.

This has meant issuing hundreds of billions of dollars of IOUs, using up the hundreds of billions in cash that the government had in its accounts, and also using up the tax money that it collected in the intervening months.

The deadline is also not set in stone. If the government can eek out a few more weeks and make its money last until June 15th there will be another injection of tax money into the coffers as another tax deadline approaches.

– What is needed to raise the debt ceiling?

A bill that would raise the debt ceiling would need to get a majority of votes in both the US Senate and the House of Representatives.

The Senate is controlled by Democrats so any increase that Joe Biden wants to get will more likely pass there. But Republican-controlled House is a bigger hurdle.

Republican House Speaker Kevin McCarthy is also very weak. It took 15 attempts for him to manage to convince enough Republicans to vote for him to become the speaker.

He therefore cannot afford to lose the support of more than a few of his colleagues, including some on the extreme fringe of the party.

– What would have happened if the debt ceiling was hit?

The US government would essentially not have enough money to pay all its bills. That does not mean it cannot pay any bills.

The evidence suggests that it would pause payments on day one after running out of money, then wait until it had collected enough cash to pay off all of its day one bills, before starting to save again until it can pay off day two’s bills, and so on.

– What would the economic impact be of hitting the debt ceiling?

Ultimately much more than can be summarised here.

It also would depend on how long the situation goes on for. In early May, Alec Phillips, chief US political economist at Goldman Sachs Research, warned that a delay of any more than a few days would see massive amounts of money being pulled from the US economy and could easily tip the US into a recession.

Even coming close to the deadline could create problems. In the 2011 debt ceiling battle, rating agency Standard & Poor’s downgraded the US’s credit rating even though a deal was reached a day before the deadline.

“On the economic side it’s not complicated. It would just be bad,” Mr Phillips said.

He said that a brief delay would, from a direct economic perspective, be worth around $10 billion a day.

The Congressional Budget Office and the US Treasury Department estimate that any brinkmanship could cost 200,000 jobs in the third quarter of the year, a short default would put half a million out of work while a protracted default would see 8.3 million jobs lost and 6.1 per cent shaved off GDP.

The economic impacts will also be felt globally, as so much of the world economy is based on the US financial system.