A debt ceiling is a legal mandate that limits the amount of debt a government can accumulate. This mandate is determined through policymaking. Reaching the limit would render the government unable to borrow capital until a new limit is set. However, in certain cases, policymakers and relevant government authorities would fail to reach an agreement as regards raising the debt ceiling, especially when another party demands certain preconditions. This disagreement results in a standoff and triggers a debt-ceiling crisis.
Debt-Ceiling Crisis Explained: Understanding the United States Debt Ceiling and Its Potential to Lead to a Political and Economic Crisis
Background: Purpose of Limiting Borrowing
The United States government borrows money for several reasons. These include financing its budget deficits due to its expenses exceeding its revenue collection, stimulating the economy as part of an expansionist fiscal policy during periods of economic slowdowns or downturns and recession, refinancing its existing debts or replacing old debt with new debt, investing and spending in long-term public projects, and responding to emergencies and crises.
However, while incurring debt is a normal part of fiscal management observed even by the most developed and advanced economies, the U.S. government limits the amount it could borrow. This is called the debt ceiling or debt limit. It is a statutory limit specifically imposed by the U.S. Congress on the total amount of national debt that the U.S. Treasury can incur to fund government operations and meet financial obligations.
It was in 1917 when the limit was introduced by Congress when it voted to give the Treasury the right to issue bonds for financing the American participation in the First World War. The power of the legislative branch to issue and determine a debt ceiling is based on Article 1, Section 8, Clause 2 of the U.S. Constitution which states that only Congress has the authority to borrow money on the credit of the United States.
The debt ceiling essentially represents the maximum level of debt that the U.S. government can accumulate. Its general purpose is to provide the Congress with control over government borrowing and spending. This is part of the greater checks and balances. It also serves as a mechanism for lawmakers to debate and negotiate activities and decisions related to fiscal management such as spending levels, taxation, and deficit reduction measures.
Causes: How the Debt Ceiling Turns Into a Crisis
Nearing and reaching the debt ceiling trigger a debt-ceiling crisis. The problem ensues when the government fails to raise the limit and creates challenges and risks concerning its capacity to meet its financial obligations. The debt-ceiling crisis is more of a political crisis or standoff because it falls within the purview of the legislative and the executive branches of the government but it can result in a domestic and a global economic crisis.
Several instances of debt-ceiling crises have occurred in the past. The 2011 U.S. Debt-Ceiling Crisis transpired when the Republican-controlled House of Representatives demanded then U.S. President Barack Obama negotiate over deficit reduction in exchange for raising the debt ceiling. The U.S. Treasury was nearing its borrowing authority and the Congress essentially wanted to negotiate first with Obama before it raises the debt ceiling.
The crisis in 2011 led to the passage of the Budget Control Act of 2011 which raised the debt ceiling to USD 16.394 trillion. However, in 2013, the government once again reached this limit. The Republican Party in Congress opposed raising the limit unless Obama defund the Affordable Care Act or Obamacare. This led to the 2013 U.S. Debt-Ceiling Crisis which was later resolved with the passage of the Continuing Appropriations Act of 2014.
Since 2013, and without budgetary preconditions attached, the debt ceiling had been increased multiple times. However, in January 2023, the Republican lawmakers proposed cutting spending back to 2022 levels as a precondition to raising the limit while Democrat lawmakers insisted on raising the limit without preconditions. The U.S. government hits its debt ceiling on 19 January 2023 and the legislative impasse has triggered the 2023 U.S. Debt-Ceiling Crisis.
Impacts: Negative Effects of a Debt-Ceiling Crisis
Remember that the debt-ceiling crisis is a political crisis stemming from a standoff among members of the legislative branch of the government or between the legislative and executive branches. It is a political standoff or a political impasse resulting from decision-makers failing to reach a consensus and leading to delays in raising the debt ceiling. The deadlock affects the political landscape while also creating uncertainties in the U.S. government.
One of the most immediate impacts of a debt-ceiling crisis is a government shutdown. This situation would transpire in periods of budget deficits and mounting debts. The ceiling would prevent the government from raising new funds from capital markets and via the U.S. Treasury to finance its operations. The cash shortage would lead to problems in paying recurring bills and releasing the salaries of federal government employees.
Another unfavorable effect of the situation is the risk of default. Failure to resolve the crisis would prevent the U.S. Treasury from issuing new government securities or refinancing its old debt obligations with new debt. The limit would essentially render it unable to make interest payments on existing debt. The federal government could also run out of cash to pay government contractors or fund its recurring social services programs.
The biggest and most serious impact of the debt-ceiling crisis is a domestic economic crisis and a global economic meltdown. A default on U.S. government debt would have far-reaching consequences. These include higher borrowing costs for the government, businesses, and individuals, loss of confidence in the U.S. dollar, destabilization of the financial markets, and a wider global financial crisis that can result in an overall economic downturn.
Solutions: How the Crisis is Tackled and Resolved
The obvious solution to a debt-ceiling crisis is for legislators to pass a new bill that would raise the debt ceiling. This has been observed in the crises that transpired in 2011 and 2013. However, for some critics of the U.S. sovereign debt, raising the limit is a short-term solution to the actual problem that the U.S. government has incurred large financial obligations that render it dependent on debt because it is not generating enough revenues.
Another possible workaround is for a sitting president to invoke the 14th Amendment to the U.S. Constitution. The amendment is widely referenced and invoked for its provisions granting citizenship to freed slaves and establishing equal rights. However, in Section 4, a provision states that the validity of the public debt of the government, including debts incurred for payment of pensions and bounties for services, should not be questioned.
Several constitutional experts believe that the aforesaid provision makes the debt ceiling unconditional. Hence, based on the provision, the executive branch of the government might have the constitutional power to disregard the debt ceiling, issue an executive order that invokes Section 4 of the 14th Amendment to the U.S. Constitution, and order the U.S. Treasury to continue issuing new securities and making payments.
The workaround based on the 14th Amendment would trigger legal debates, and the judiciary branch of the government might step in to evaluate the legality of its invocation. Other solutions center on reforms to the debt ceiling process through legislative actions. These include eliminating the mechanism, implementing automatic increases based on fiscal or economic indicators, or establishing alternative mechanisms for fiscal oversight.
