US Congress Raises the Federal Government's Debt Ceiling by $2.5 Trillion

The U.S. Congress passed legislation early Wednesday that would raise the federal government's debt ceiling by $2.5 trillion, setting it at $31.4 trillion, to avoid what would have been the first-ever federal default in the history of the United States.

The move came just days before the experts warned that the US would be unable to service its debt obligations.

The US Treasury Secretary, Janet Yellen estimated that the country would run out of ways to pay its debt on December 15. Had the debt ceiling not been raised and the Treasury missed the payment, the country would default for the first time and eventually slip into a recession.

Furthermore, the bill probably will prevent the next showdown over lifting borrowing limits until at least 2023, ending the fiscal drama for the time being.

The Democrats vs Republicans Showdown

The measure culminated in the months-long conflict between Democratic and Republican, the two major political parties in the US. The US Senate held by Democrats and the House, both chambers of the Congress approved the ceiling increase with only one Republican vote of Representative Adam Kinzinger of Illinois in favor. 

While Republicans opposed the legislation en masse, the Democrats supported it in unison and led it to pass through the Senate 50 to 49 along party lines on Tuesday and then through the House in a 221-to-209 vote just after Wednesday midnight.

The fiscal drama came to a tidy conclusion after months of partisan fighting and market uncertainty. 

The 11th-hour deal on debt ceiling

A deal last week between Democratic Senate Majority Leader Chuck Schumer and his Republican counterpart, Mitch McConnell, took place where the party leaders announced the establishment of a one-time fast-track process to increase the debt ceiling with a simple majority vote, bypassing the normal Senate rules requiring at least 60 votes to advance most legislation through the Senate.

President Joe Biden, as he signed the bill to fast-track the process to raise the debt limit said, “The United States pays its debts when they are due.”This bill will reassure all the economic markets at home and around the world that we're going to continue to pay our debts when they are due, and that's what this is all about”, he added.

Opposition's Reaction

For months, Republicans prevented the Democrats from voting on long-term legislation to raise the debt ceiling, using the filibuster which is a deliberate attempt to prolong debate and delay voting on a bill or amendment. 

Raising the limit past $30 trillion for the first time, the Republicans are particularly expected to use this issue to attack Democrats in the upcoming 2022 midterm election campaign ads. Calling it 'overspending', Republicans have tried to link the increase to Biden's $1.75 trillion “Build Back Better” agenda to combat climate change and strengthen the social safety net.

Former President Donald J. Trump railed against Senator McConnell throughout the weekend, constantly calling on Republicans to oust him as a leader.

Senator Tim Scott of the Republican Party said, “We cannot continue to ignore the growing national debt. That's why I voted NO on raising the debt ceiling. This only allows for more reckless spending and puts future generations of Americans in deeper debt. We must get our fiscal house in order.”

Source: Statista

What if the US defaulted?

In the event of a failure to raise the debt ceiling in time and the Treasury running out of cash, the US economy would certainly get affected at a macro level, with experts predicting rate spikes and falling stock prices.               

If that were the case, the government would have to decide which financial obligations would be met first. Even though bondholders may get their interest payments on time, the government might not be able to pay out other benefits, causing fiscal tightening, some claims, could spark a recession.

Were there to be a default, six million jobs and $15 trillion in household wealth would be lost, with the increased cost of mortgages and other borrowings.

A government spending freeze would certainly take its toll on individuals too, as it will result in slashed funding for vital programs like food assistance for low-income Americans, Medicare, and Social Security, as well as veteran payouts.  

Understanding the US debt ceiling

The debt ceiling or the debt limit is the maximum amount of money that the federal government is authorized to borrow to fulfill its financial commitments by issuing Treasury bills and bonds.

The US spends more money than it collects through taxation, thereby running into a budget deficit, and borrowing huge sums of money. A cap on the debt limit regulates the government's spending ensuring fiscal responsibility.

Debt limits were instituted during World War I so the Treasury could issue bonds when it needed to pay bills without having to ask for permission each time.

Since 1960, the debt ceiling has been raised, extended, or revised 78 times in order to keep the U.S. economy afloat and avoid default, with no sign of Congress considering alternative methods, despite concerns about the debt ceiling's efficacy.

Raising the debt ceiling means the country can take on more debt; while suspending it lets it borrow limitlessly until Congress specifies a date.

In 2019, it was voted to suspend the ceiling for two years under President Donald Trump, which expired on August 1 this year. Congress's inaction this week, according to Yellen, would have led to the US defaulting on its debts on December 15.

The Bottom Line

The $2.5 trillion raise is the largest dollar increase in debt ceiling history, making it even bigger when lawmakers agreed to raise the limit in three stages by $2.1 trillion as part of a deficit-cutting package. Even so, it is still a smaller percentage boost (â–²+8.5%) than the 2011 law or 2010 measure where the ceiling was raised by $1.9 trillion, bringing the borrowing cap roughly 15% higher.

by Mahima Jain



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