Agreement Reached to Raise the US Debt Ceiling

Photo Credit: Francis Chung/Politico

The United States narrowly avoided a default on its debt when President Joe Biden signed the Fiscal Responsibility Act of 2023 into law on June 3, ending the stalemate between Democrats and Republicans in the US Congress over the contentious debt ceiling.

The debt ceiling is the maximum amount the US Treasury Department is allowed to borrow to repay its past debts. Raising the debt ceiling was once considered a standard occurrence, however in recent years, it has been seen as an opportunity for political leverage.

The debt ceiling was reached in mid-January this year, with US Treasury Secretary Janet Yellen warning that if the debt ceiling was not raised, the United States could default on its loans as early as June 5. A default, Yellen said, would be an “economic catastrophe”. 

This would have prevented the US government from paying back its creditors, meaning interest rates would have drastically increased. In addition, the government would have had to cut its spending in certain sectors, and financial markets would begin to collapse, creating general turmoil within the economy. 

The White House has predicted that if a prolonged default were to occur, it would cause an “immediate, sharp recession”, with an estimated 8 million jobs lost and far reaching consequences for the global financial system.

Photo Credit: The White House/Twitter via CNN

After months of negotiations between Republicans and Democrats, the Fiscal Responsibility Act of 2023 was enacted into law, suspending the debt ceiling until Jan. 1, 2025.

Between the period in which the government breached its debt ceiling and the signing of the bill, they were no longer allowed to borrow money. Instead, the government resorted to selling existing investments and suspending reinvestments of the Civil Service Retirement and Disability Fund and the Postal Service Retiree Health Benefits Fund, which gave the federal government billions to spend.

Within the next two years, the debt ceiling deal allows the US Treasury to borrow as much money as is required to pay the nation’s bills. The current cap on government debt lies at $31.4 trillion, and the limit following the suspension will lie at the amount borrowed at that period.

The act has required the federal government to make minor cuts on spending, including a reduction in the growth of federal discretionary spending within the next two years. Requests for cuts centred from conservative members of the US House of Representatives. Republicans have advocated for a serious drop in government spending which they communicated to Republican House Speaker Kevin McCarthy before demands were made. 

McCarthy has received backlash from Republican representatives after agreeing to the bill which included spending restrictions far beneath what members of the House called for in programs funded by annual appropriations. His approval of the bill resulted in members of the House Freedom Caucus, hard-right Republicans, disrupting House business. Regular votes were not taken, a pair of pro-gas stove bills stalled out, and some lawmakers asked if they could leave work in protest of McCarthy’s leadership.

Although the debt ceiling has been suspended, the government is still receiving negative feedback. Fitch Ratings recently placed the US government’s debt on negative watch for a possible credit downgrade. Such a downgrade has only occurred once, after the 2011 debt-ceiling crisis resulted in the Budget Control Act of 2011, which permitted the federal debt ceiling to be raised. In response to Fitch’s ratings, White House Press Secretary Karine Jean-Pierre claimed that the market for US Treasury bonds “remains the safest, the deepest, and the most liquid market in the world.”