By Sanjana Shukla

The US has managed to avoid default after the US Congress finally came to a tentative bipartisan agreement to suspend the debt ceiling of $31.4 trillion. Had the US defaulted on its debt obligations, it would have plunged their economy into a recession. US debt has been growing, needing frequent raising of the debt limit, and causing frequent volatility. Removing the ceiling would not only bring attention back to spending and taxation to deal with the debt, it would also no longer cause increasingly frequent and unnecessary waves in the global markets. Recent hearings by the Senate Budget Committee, the Joint Economic Committee, and the US House Committee, all have discussed the inefficacy of the debt ceiling.

US Debt has risen every year since 2007—from $9 trillion in December 2007 to $31 trillion in May 2023, and with the agreement to suspend the limit without any agreement on spending cuts, it will continue to do so. US debt states have two components—debt held by the public and by the government. While intragovernmental holdings have increased from $4 trillion to $7 trillion, debt held by private players and sovereign countries has increased five times to $25 trillion in May, 2023. As of January 2023, around 30% of the publicly-held debt is in foreign-owned US treasury bonds, with Japan and China being the largest owners. Japan and China have increased ownership of US bonds with a marked rise after the financial crisis of 2008-2009. China has reduced its ownership owing to the rise in sanctions by the US, yet still remains the second-highest holder. The US debt is not a domestic issue. A potential default would considerably weaken the US’s position in the global financial system—a situation beneficial to China which is trying to increasingly internationalise the yuan.

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Prior to 1917, the US Congress issued each bond individually by debating it on the floor. To smoothly finance US efforts during World War I, an upper limit for debt dubbed “debt ceiling” was established. It was meant to free the government to quickly finance its expenditures while remaining fiscally responsible. Since the debt ceiling only governs the limit of indebtedness and not the spending or taxation by the government, it has had little to no effect in controlling US indebtedness. The US fiscal balance has fallen in the last two decades from a surplus of $128 billion in 2001 to a deficit of $1.4 trillion in 2022; the debt-to-GDP ratio has more than doubled from 54% of GDP in 2001 to 121% in 2022. The debt ceiling has increased 78 times between 1960 to 2021, most recently raised in December 2021. It has never been lowered. Both Republicans and Democrats have raised the debt ceiling when in power, reducing it to little more than a bargaining chip—a political tool to be used when in opposition to create the spectre of looming default, but in the process, spilling volatility into global financial markets, thus exposing smaller economies to increased levels of risk and uncertainty. The ceiling was raised seven times under George W Bush, eight times under Bill Clinton, and 18 times under Ronald Reagan.

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Recently, JP Morgan Chase CEO Jamie Dimon voiced his fear on the volatility in markets across the world the closer they got to “X-date” or the day the US defaults on the debt. No one expects the US to default, but this debate over the debt ceiling has led to government shutdowns, increase in uncertainty in global markets and a drop in ratings of the US without affecting the debt burden whatsoever. Even now, the tentative agreement between the Republicans and the Democrats still does not touch on taxation and doesn’t include the large spending cuts required to reduce debt in the absence of increasing revenues. The debt ceiling has unsurprisingly, again, failed at dealing with the true predicament.

The writer is research associate, ICRIER

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