Breaking The (Debt) Ceiling: America's fiscal crisis and its Global Implications
cnn.com
The United States is in the middle of a fiscal fight, the ramifications of which stretch far beyond its borders. The richest country on the planet is about to breach its borrowing limit, or debt ceiling, which would have dire ramifications for the American, and global, economy.
The debt ceiling is currently set at $31.4 trillion; this is an enormous amount. To contextualise, the US owes as much money as the next four countries with the highest debt, including China ($14 trillion), Japan ($10.2 trillion), France ($3.1 trillion) and Italy ($2.9 trillion). The debt ceiling would have been breached in January, but the Treasury has used “extraordinary measures” to ensure that the government can continue to function up until the 5th of June. However, as the ‘X date’ approaches, the Federal Government is getting close to running out of money. This would have disastrous consequences for the US, and global, economy, and also tells us much about the state of American politics.
Economically, the debt ceiling is a huge issue in local geopolitics and economics; the US is the world’s largest economy and richest country, and in a sense much of world is economically reliant on it. Any instability in the US economy has dire consequences for the rest of the world; this is seen in the Great Depression from 1929, the 2008 financial crisis, and even the bank failures of early 2023, who’s tremors shook the global markets, to differing extents.
What does this mean for the corporate world? The White House has predicted that hitting the debt ceiling would create “significant disruptions to financial markets” and “severe damage to the U.S. economy”, which, given that the US economy is so fundamental to the wellbeing of the global economy, has serious consequences for everyone. However, this is only if the government runs out of money, the ‘best-case worst scenario’, which would involve a government shut-down. This is not unheard of; there were shutdowns under President Clinton, for example, but it is still a hugely risk that leads to instability in global markets.
The worse-case scenario is a default on the debt; this is when the US doesn’t even have the money to pay the interest or repayments on the money that it has borrowed. Even a short-term default would see “spiking interest rates and plunging equity prices”, with an immediate decline in GDP, directly affecting Americans and, to a lesser extent, the global population. However, a prolonged default, the worst possible scenario, would see an “immediate, sharp recession on the order of the Great Recession”, with ramifications similar to those of 2008.
The debt ceiling is a microcosm of Washington politics; it exposes party polarisation as the key driver of political action on the Hill, and in some sense also reveals politicians’ disregard for US and global economic health when political points can be scored. The Republican-controlled House has used the debt ceiling as a political bargaining tool to try and force the Biden administration to yield to some of their demands, which the White House has ultimately had to do. This pattern of behaviour is similar to that under Clinton, when the House refused to raise the debt ceiling without gutting funding for the President’s policies, exposing their disregard for the economic wellbeing of the country. Furthermore, when Trump was in the White House, the debt limit was raised three times without debate; now that a Democrat is in the White House and the Republicans control one of the chambers of Congress, it has once again become an inter-party bargaining chip. But of course, Republicans wouldn’t oppose raising the debt ceiling for a President of their own party.
This crisis is only fuelling polarisation, with Democrats blaming Republicans for trying to force through their agenda on pain of a shutdown or default, and Republicans castigating Democrats for not compromising policy to raise the limit. A resolution is in sight, as Speaker McCarthy has pushed a Bill through the House in an effort to raise the ceiling, and the Senate has just passed the Bill, sending it to Biden’s desk. Tellingly, in the House nearly 32% (71) hard-line Republicans voted against the Bill and only 67.1% (149) Republicans voted for it, whereas 77.4% (165) Democrats voted for the compromise Bill. Clearly, from the data, House Republicans are keener than Democrats to use the debt crisis to score political points.
This 99-page Bill has passed through the House, and has just passed through the Senate, meeting the approval (or perhaps merely being acceptable to) both Republicans in the lower chamber and Democrats in the upper. The Bill would extend the debt ceiling, but it revokes some of Biden’s key policies, such as student debt relief, and House Republicans also want more work requirements for those receiving healthcare and food welfare.
This split of control between the chambers of Congress could have been politically dangerous; it risked a disagreement between the GOP-led House and Democratic Senate that could have resulted in the Bill’s failure. Thankfully, the compromise seems to be acceptable to enough people, with only Biden needing to sign for crisis to be averted; as this was his initiative, we can only hope that the compromise Bill is acceptable to the President.
Ultimately, the use of the government’s finances as political leverage by Republicans shows disregard for America’s greater welfare and even the global economy. This reveals the prioritisation of partisan politics over economic health, and risks a global tremor (or even crisis) because Republicans are trying to use the crisis to force the administration to yield. America cannot disregard its global economic clout, and it is imperative that a bipartisan solution is found for the sake of worldwide economic stability.
Because different parties hold the legislature and executive, this crisis also exacerbates both partisan and executive-legislative tensions, with the White House compromising with the House of Representatives to find a solution. It could be a symbol of compromise – Biden and McCarthy have hammered out an agreement that is meant to be acceptable to both Republicans and Democrats – but it could also exacerbate partisan tensions. Either way, it is imperative that the White House and Congress find a solution, for the health of the American, and global, economy.
by Callum Tilley