Raising the debt ceiling has come to center stage again in Washington D.C. as Senate Republicans threatened to vote against an increase or suspension to the debt ceiling unless Congress first agrees to new spending cuts or other measures, to counteract President Biden massive spending bills. The debt ceiling takes effect Aug. 1, which if not raised could risk default of US backed debt securities.
The new ultimatum marked a reversal for Republicans, who agreed to address the debt ceiling — the statutory amount the government can borrow to pay its bills — multiple times to advance policies under President Donald Trump that helped add $7 trillion to the federal debt during his term. The last time Congress voted to suspend the debt ceiling was in 2019, covering the extension to the end of July 2021. Since then, the nation has added $6.5 trillion in debt, bringing the total amount owed to $28.5 trillion.Washington Post
If Congress cannot reach a deal to raise or suspend the ceiling by month’s end, the government would have to rely on what are known as “extraordinary measures” to keep paying its bills. This was used in some of the prior debt ceiling showdowns (see earlier update), but caused a lot of market volatility due to the uncertainty it creates locally and globally.
The national debt debate continues with millions of federally funded individuals and corporations facing the real prospect of taking a big hit to their bottom line if the debt ceiling is not raised. Whichever side of the debate you are, the fact is that over the past 30 years the debt ceiling has been increased by both parties and a number of democratic and republican presidents. This is borne out in the graphic below from the Washington post.
The biggest contention on a “big debt” deal being reached is essentially around including tax hikes and/or repeal of current tax breaks as part of the equation to justify raising the debt ceiling. While spending cuts, which mainly affect those who rely on government funded entitlement programs, will reduce how much needs to be borrowed, tax hikes provide a much more long lasting source of revenue and generally affects a smaller base of higher income earners. This is what the democrats are saying. Republicans on the other hand feel that any tax hikes or repeals will slow down economic growth since small and large business owners, who will be the primary groups impacted by tax hikes, will cut back on spending and hence hiring.
Both parties have debt reduction plans in place and next week Republicans will put forward their plan for a vote in the house (which they control) while Democrats will try and muster more support for the President’s proposals. However neither party has the numbers to get a plan all the way through Congress and unless tax hikes are in the plan, Obama will not sign off on the deal.
My opinion is that if no debt reduction plan is reached in the next two weeks a short term extension will be put in place for an interim increase in the debt ceiling. Congress and the American economy will then continue to muddle along until a more effective plan is put in place. But I would be willing to bet that we will be back to square one the next time it comes to raising the debt ceiling. The game of political football will resume once again.