The sky is the limit - except if it's the US debt ceiling
Another year of just...making it higher?
The US Congress finally found a solution to the latest debt ceiling crisis, making this the 79th time it has been raised, suspended or otherwise changed - and avoiding a potentially disastrous default that would have sent markets worldwide spiraling. Let’s explore what exactly a debt ceiling is, how we got here, and what the future might hold.
Disaster avoided - for now
The debt ceiling is a statutory limit on the debt the federal government can legally have to fund all its activities. Created in 1917 by the US Congress, it was a way to keep the government’s spending at a responsible and ‘reasonable’ amount. In January, the current ceiling of $31.4T was reached and the government had slowly been creeping closer and closer to default before a last-minute deal suspended the debt ceiling to January 2025.
If the level of debt hits the limit, the government would have had to take special measures in order to continue their operations by either raising or suspending the limit (which they have done now) - or simply continue over the ceiling until they can’t pay anymore, sending the country into a default.
Check out the video below to see how the debt ceiling has evolved since the 70s - see how many times it has been raised? This has led to many questioning whether there is even a point to a ceiling - since they’ll probably just move it again. Many other countries also set limits to their debt, but Denmark is the only other democratic country that sets their limit at a specific figure. The method used by other countries is based on a percentage of GDP, rather than a hard limit - for example, EU countries must pledge to keep their debt below 60% of GDP (however, some countries have exceeded their limits, leading to plans for a revision of this rule).
Raising the debt ceiling has, in recent times, been more affected by political agendas than by real economic discussions. Both political parties frequently use it as a bargaining chip to push other policies that really, have little to do with matters of national debt. The latest debt ceiling suspension deal was only put through after both parties agreed on some funding cuts and spending limits here and there, but leaves us questioning - will there come a point when the limit looms close, a deal cannot be struck, and the country’s (and the wider world’s) economy hinges on whether Congress decides to pass some random bill to make the rich that liiiiittle bit richer?
A country as large and economically powerful as the US has trillions of dollars in debt, which means any major economic crisis (read: a default) would have large ramifications on the global economy. This is why, for example, the Greek government debt crisis in 2015 where they did actually default didn’t have as much of a global impact. However, even coming close to a default still has its effects - in 2011, Standard and Poor downgraded the US national debt from the highest rating of AAA to AA+ because the debate was taking so long, while in 2013 and 2018 the government actually shut down for a while.