What Is The US Debt Ceiling 2023 And What Happens If It's Not Raised?

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The meeting between US President Joe Biden and the House and Senate leaders to discuss budget priorities and raise the debt ceiling limit ended without agreement, which is concerning given the country’s imminent financial obligations. Lawmakers must act before June 1 to increase or suspend the debt ceiling, or risk default and a potential global economic crisis.

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What is debt ceiling?

The debt ceiling in the US is a legal constraint on the maximum amount of funds that the federal government can borrow. This was established by the Second Liberty Bond Act of 1917, and it is also referred to as the debt limit or statutory debt limit.

When the debt ceiling is increased, the US Treasury must explore alternate means of covering expenditures, such as compensating federal staff, the armed forces, social security and medicare, in addition to satisfying the interest on the national debt and tax refunds.

As a legislative practice, the US Congress votes to modify the ceiling by either raising or suspending it.

The BBC reports that the current limit is $31.4 trillion. Although the cap was exceeded in January, the treasury implemented “extraordinary measures” to provide additional funds to the government.

What happens if debt ceiling is not raised?

Without raising the borrowing limit, the US federal government may exhaust its funds, resulting in inability to fulfill wage and other financial obligations. In such a scenario, national parks and other agencies may shut down, although this has yet to occur.

The US Treasury Secretary has cautioned about severe outcomes. “It is the responsibility of Congress to act on this matter. If they are unsuccessful, we will experience a self-inflicted economic and financial calamity,” she stated on Sunday.

AFP reported that Yellen discussed brinkmanship risks with CEOs.

What happens if the US defaults?

Failing to increase the debt ceiling would have a significant impact on the global financial system. This is due to the fact that over $500 billion worth of US debt is traded daily.

Moody’s Analytics predicts that a prolonged stand-off between the legislature and the executive will cause stock prices to drop by nearly 20% and the US economy to contract by over 4%.

The agency predicts over seven million job losses.

Political developments

This prolonged conflict has the potential to cause global turmoil, despite similar past incidents. The root of the issue lies in the fact that the lower chamber, known as the House of Representatives, is under Republican control, while the 100-member Senate is led by Democrats.

The division has greatly impacted the parties’ capacity to successfully enact significant legislation in Congress, especially the Democrats, who currently control the presidency.