What is US debt ceiling all about and why is it important to the US economy?

New Delhi: The increasing of the debt ceiling is viewed as a beneficial move for the whole US economy since it would ostensibly avert a default, which would have resulted in a recession, massive job losses, and the ruin of retirement accounts.

The Republican and Democratic parties in the United States of America agreed, albeit in principle, to raise the debt ceiling in order to avoid pushing their country into a situation akin to default. Despite the fact that all parties have reached an agreement, the Bill has yet to be approved by the US Congress.

What is the US debt ceiling?

Post weeks of debates, negotiations and speculations, all parties reached an agreement on the fundamental components of the Fiscal Responsibility Act of 2023. This text is 99 pages long and was released on Sunday night; it will now be debated in the following days.

Although the finer specifics of the agreement have yet to be made public, the primary measures include extending the debt limit to $31.4 trillion. This includes freezing non-defence government spending for two years before increasing it by one per cent in 2025.

The increase of the debt ceiling is considered a favourable move for the overall economy since it would obviate a default, which would have resulted in a recession, massive job losses, inflation, and the ruin of retirement assets.

Why must political rivals agree to a point?

Look at how the Indian Parliament is divided into two houses: the Lok Sabha and the Rajya Sabha. Similarly, the US Congress is divided into two houses: the Senate and the House of Representatives. In America, the ruling party is the Democratic Party, which has a majority in one house but a minority in the other.

The Republican Party controls the House of Representatives, while the Democrats, led by US President Joe Biden, control the Senate. This explains why for any significant policy choice like this one to become law, the two parties' unanimity was critical.

Without the political parties (aka rivals) coming to a consensus, a US default would become a possibility, potentially destabilizing global markets.

The need to raise the US debt ceiling

Had the political rivals fallen out on the agreement, the federal government would have run out of finances to pay for welfare payouts and other support initiatives. In the medium to long term, this would send the US economy into recession, resulting in massive job losses. And, in the event of a recession, the economy of the majority of big countries would have suffered.

Furthermore, because the US dollar is the world’s reserve currency, a default would have triggered a panic-like situation around the world, resulting in quick inflation and interruption in the smooth flow of goods and services.

What does the deal entail?

The agreement would also return part of the funds that Congress appropriated for the coronavirus outbreak but did not use. A statement from Republican House Speaker Kevin McCarthy’s office stated that the agreement will revoke billions of dollars in unspent Covid money. Among other things, the agreement creates employment requirements for persons receiving federal food assistance or family welfare.

It is planned to raise the age at which childless persons must work in order to get food stamps from 49 to 54.