US Debt Ceiling Crisis

What’s in today’s article?

• Why in news?
• What is U.S. debt ceiling?
• What is Current debt ceiling crisis?
• What will happen if the U.S. defaults?
• News Summary: US debt ceiling crisis
• key points of the deal

 

Why in news?

• Days before the US govt’s debt default deadline, President Biden and House Speaker McCarthy reached an agreement in principle to raise the nation’s legal debt ceiling.

 

What is U.S. debt ceiling?

• Origin of debt ceiling in US
  • In 1917, Congress passed the Second Liberty Bond Act, to allow then-President to take out funds for the First World War without waiting for the approvals of absent Congress lawmakers.
  • However, the Congress created a limit on borrowing, thus creating a debt ceiling that could only be raised by approval of the Congress (House and Senate).
    • This ceiling was created to curtail the President’s spending capacity.
• Debt ceiling in its current form
  • The debt ceiling started to take its present-day form in 1939, when separate borrowing caps for bonds were consolidated into one debt ceiling.
    • At that time, it was set at $45 billion.
  • The U.S. government has hit or come close to hitting the debt ceiling multiple times.
  • While the government continues to receive taxation revenue after hitting the debt ceiling, it cannot borrow any more to pay its existing bills.

 

What is Current debt ceiling crisis?

• The Democrats-led US government had in January hit its debt ceiling — the amount it is legally allowed to borrow for its expenses.
• With no new money coming in, Treasury Department Secretary had warned that funds would run out by the first week of June 2023.
• Since then, the Republican-dominated House of Representatives and President Biden’s White House have failed to reach a consensus to raise or suspend the debt ceiling.
• This stalemate led to the current debt ceiling crisis in USA.

 

What will happen if the U.S. defaults?

• If the debt ceiling is not raised once the government reaches the ceiling and runs out of cash, the U.S. would be unable to pay its debt-holders, resulting in a default.
• Domestic payments
  • In this case, the government would be unable to pay its bills including military salaries, benefits to retirees, and interest and other payments it owes to bondholders.
• Global financial crisis
  • If the government cannot make interest payments to domestic and foreign investors, it could plunge the globe into a financial crisis.
  • It would also increase the national debt, in turn causing widespread interest rate hikes for business owners, mortgages, and other sectors.
  • A drop in U.S. consumer confidence would translate to shocks in the financial market, tipping the economy into recession.
  • More than half of the world’s foreign currency reserves are held in U.S. dollars. Hence, a US default would affect the treasury markets around the world.
    • A loss of confidence in the U.S. economy could force investors to sell U.S. Treasury bonds, thus weakening the dollar.
    • A sudden decrease in the currency’s value could domino across treasury markets as the value of these reserves drops.
• Downgraded creditworthiness of US
  • A U.S. default could lead to another downgrade of U.S. creditworthiness by agencies which in turn would raise the cost of borrowing for the government.
• Impact on economy
  • It would result in large-scale job losses, weakening of the dollar, stock sell-offs.

 

News Summary: US debt ceiling crisis

• President Joe Biden and Republican House Speaker Kevin McCarthy agreed on a deal that can potentially avert the US debt ceiling crisis.

 

Key points of the deal

• A cap and a raise
  • Under the deal, the $31.4 trillion debt ceiling will be suspended until January 2025. Till then, the government can keep borrowing to fund itself.
  • In return, the White House has agreed to cap non-defence discretionary spending at 2023 levels in 2024, and increase it by 1% the year after.
• Work requirements made stricter
  • From the Democrat side, President Biden has agreed to increase work requirements for those who avail of government food stamps.
    • Supplemental Nutrition Assistance Program (SNAP) benefits are commonly known as food stamps.
    • Able-bodied adults without dependents between the ages of 18 and 49 were subject to work requirements to maintain eligibility for SNAP benefits.
      • Under the current deal, the age limit will be raised to 54.
    • These requirements included actively seeking employment, participating in a suitable employment and training program, or working a minimum number of hours per month.
• Streamlining energy projects approval
  • The government has agreed to the Republican demand of a more streamlined system of approval for energy projects.
• IRS, Covid fund
  • Under the deal, the outlay the Biden government had secured for beefing up the Internal Revenue System (IRS) sees a cut.
  • Leftover Covid relief fund will be taken back, including that kept aside for tackling disasters.

 

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Q1) What is Internal Revenue Service?

The Internal Revenue Service is the revenue service of the United States federal government. It is responsible for the administration and enforcement of the Internal Revenue Code, which includes the collection of taxes and the interpretation and enforcement of tax laws.

 

Q2) What is   Supplemental Nutrition Assistance Program (SNAP)?

Supplemental Nutrition Assistance Program (SNAP) benefits are commonly known as food stamps. Able-bodied adults without dependents between the ages of 18 and 49 were subject to work requirements to maintain eligibility for SNAP benefits.

 

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Source: US debt ceiling crisis: What is the deal Biden and McCarthy have struck | US Department of Agriculture | Indian Express | The Hindu