US President Joe Biden and Republican House Speaker Kevin McCarthy have called their latest round of negotiations on the debt ceiling “productive”, but they still haven’t reached a deal to avoid looming debt default. On Monday, House Speaker Kevin McCarthy after the meeting in White House, said, “I felt we had a productive discussion. We don't have an agreement yet, but I did feel the discussion was productive in areas (where) we have differences of opinion."
This is his first one-on-one talk in months with President Joe Biden. The President ended his trip to Japan for the G7 summit early and returned to the US on Sunday to address the deadlock over US debt.
Taking to Twitter on Tuesday morning, Biden said, "I just concluded a productive meeting with Speaker McCarthy about the need to prevent default and avoid a catastrophe for our economy. We reiterated once again that default is off the table and the only way to move forward is in good faith toward a bipartisan agreement. While there are areas of disagreement, the Speaker and I, and his lead negotiators Chairman McHenry and Congressman Graves, and our staffs will continue to discuss the path forward.”
The latest development comes after US Treasury Secretary Janet Yellen reiterated that the US will likely default on its debt as early as June 1. According to media reports failing to reach a deal threaten to wreak havoc on the global economy, affecting prices and mortgage rates in other countries.
Let us understand what is US Debt ceiling and how it affects the rest of the world.
What is the US debt ceiling?
Created by Congress in 1917, the debt ceiling, or a limit, sets the maximum amount of outstanding federal debt the US government can incur. The US Treasury departments websites say that the debt limit is the total amount of money that the United States government is authorised to borrow to meet its existing legal obligations, including Social Security and Medicare benefits, military salaries, interest on the national debt, tax refunds, and other payments. The debt limit does not authorise new spending commitments. It simply allows the government to finance existing legal obligations that Congresses and presidents of both parties have made in the past.
Often US Congress, when it deems fit votes on raising or suspending the ceiling so it can borrow more.
The cap currently stands at roughly $ 31.4 trillion. As of January 2023, the total national debt and the debt ceiling both stand at $31.4 trillion. According to a BBC report, Treasury Department has used "extraordinary measures" to provide the government with more cash while the talks are ongoing.
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How often debt ceiling have been raised?
Since 1960, Congress has acted 78 separate times to permanently raise, temporarily extend, or revise the definition of the debt limit – 49 times under Republican presidents and 29 times under Democratic presidents. The debt limit was increased twice in 2021, most recently in a December 2021 bill that formally increased the limit to $31.381 trillion.
US Congress can also choose to suspend the debt ceiling, or temporarily allow the Treasury to supersede the debt limit, rather than raise it by a specific amount. While this move was rare during the first ninety years of the ceiling’s existence, Congress has suspended the debt limit seven times since 2013, according to a report by the think tank Council on Foreign Relations.
When the debt limit is reached, the Treasury Department relies on cash on hand and uses a variety of accounting maneuvers, known as extraordinary measures, to avoid defaulting on the government’s obligations. According to report by Committee for a Responsible Federal Budget, an US think tank,the Treasury Department first used these measures in 1985, and there have been nine distinct “debt issuance suspension periods” since the enactment of the Budget Control Act in 2011, including the current one.
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What happens if the US defaults on its debt?
This has never happened before so it is not entirely clear, but it would cause major economic damage, says a report By BBC.
According to US Treasury Department, “Failing to increase the debt limit would have catastrophic economic consequences. It would cause the government to default on its legal obligations – an unprecedented event in American history. That would precipitate another financial crisis and threaten the jobs and savings of everyday Americans – putting the United States right back in a deep economic hole, just as the country is recovering from the recent recession.”
If the government stops making interest payments on its debt, that would also put the country into default. The US briefly entered default in 1979, which the Treasury blamed on an accidental cheque processing issue, but an intentional default would shock the financial system where more than $500 billion in US debt gets traded every day, the report said.
Moody's Analytics predicts that in a prolonged stand-off, stock prices would fall by almost a fifth and the economy would contract more than 4 per cent, leading to the loss of more than seven million jobs.
The report by Council on Foreign Relations notes a new chapter of debate over the debt ceiling began in 2011 when sparring over spending between President Barack Obama and congressional Republicans resulted in a protracted deadlock. Congress eventually reached a deal to raise the ceiling just two days before the date that the Treasury estimated it would run out of money. However, the brinkmanship triggered the most volatile week for US stocks since the 2008 financial crisis, and the credit rating agency S&P Global Ratings downgraded the United States' creditworthiness for the first and only time ever.
How will it affect the rest of the world?
If investors start to see US debt as risky they will charge the US more to borrow money, the BBC report notes adding that since government borrowing helps determine interest rates more widely, the impact would trickle out to the rest of the economy, making borrowing money for a home or a car more expensive for everyone.
There are debates about whether the government could prioritise interest payments to avoid a debt default. But honouring commitments to the owners of US debt, which include financial firms, pension funds, and foreign investors, while retirees and others go unpaid is seen as a difficult one to sell politically, the report added.
US Treasury Secretary Jenet Yellen in an interview with CNN on February 20 said that if the US government is unable to meet some of the critical expenses, it would wind up in default, a scenario that would “cause irreparable harm to the US economy, the livelihood of all Americans, and global financial stability” and would “undoubtedly” cause a recession, leading to a “global financial crisis.”
What is the current stalemate?
US political polarisation has intensified over the past decade, leading to contentious debates and government shutdowns over raising the debt ceiling.
The US Congress passed the Limit, Save, Grow Act in April 2023, proposing to suspend or raise the debt ceiling in exchange for significant cuts in spending. However, legislation prioritising debt payments has not yet been acted upon. Extraordinary measures have allowed the government to meet its obligations temporarily, but Treasury Secretary Yellen's recent letter indicates lower-than-expected tax receipts. The Congressional Budget Office (CBO) estimates the government's ability to borrow may be exhausted in early June.
President Biden insists on a clean increase to the debt ceiling, while Republicans demand spending cuts. The House passed a bill in April conditioning the debt ceiling increase on federal spending reductions, but it is unlikely to pass the Senate, and Biden threatens to veto it.
In the absence of a deal on raising the debt ceiling, some individuals have suggested that the president could invoke the 14th Amendment of the US Constitution, reported BBC. This amendment states that the validity of the public debt shall not be questioned. While President Joe Biden has expressed his consideration of this option, utilizing the 14th Amendment to challenge the debt limit law would likely lead to a legal battle and potentially trigger a constitutional crisis, the report said. Treasury Secretary Janet Yellen has also minimized the possibility of invoking the 14th Amendment, emphasizing the potential for constitutional conflicts.