Report from America - Debt Ceiling!
When the United States Congress put a policy in place regarding the national debt limit long ago, they never intended it to be used as a political bone of contention. But that is exactly what happened! And on account of that, there is great uncertainty about the economic situation in the United States and around the world.
The national debt
Every year, the United States government has to borrow to meet its commitments. There are three spending streams in the country's budget:
Compulsory spending: The government is obliged to pay for social security, health care and retirement pensions for people who are entitled to them by law, including people over 65 and military veterans. The government would have to change the laws to reduce this expenditure. These programs are very popular with the majority of the public, so it would be controversial and politically difficult to make such changes. Compulsory spending is the largest part (63%) of the national budget.
Discretionary spending: Each year, the government (the Appropriations Committee) has to review this spending and then approve it. Half of this spending goes to the American military, and the other half to various programs such as: homeland security, education, transportation, research, food safety, science and space programs, disaster relief, environmental protection, public housing, and enforcement of the federal law. Discretionary spending uses around 30% of the national budget.
Supplementary expenditure: This expenditure (7% of the budget) is used to pay interest on the national debt each year. In the year 2023, it will cost 460 billion dollars to service the debt.
Debt Ceiling
Like many countries, the United States has to borrow money, because the federal government spends more money than it receives. Unlike almost every other country, the government limits the amount of money they are allowed to borrow. Because the annual budget deficit is increasing almost every year, congress has to raise the ceiling frequently. You'd think the government wouldn't be able to spend more money (than the ceiling) in the next budget, and that would be that – wouldn't you? Unfortunately, it's not that easy.
A long time ago, the government had to approve the expenditure associated with each bill, one by one. Therefore, the debt limit was first established in 1917 and with a few changes in 1939, so that the limit applied to the budget as a whole. This was done to make the process simpler and that was all very well until 1995 when unintended consequences occurred that no one had thought of before. I will come back to that point but I have to explain one thing first. The debt limit applies to the past year and the money already spent! That is the fundamental mistake with that approach, because this system can be abused, with one party demanding certain changes to the budget in return for raising the ceiling. Without a new ceiling, the government would not be able to pay the interest on the national loan, and the country would be in default and in trouble.
Things were not like that until Republican Chairman Newt Gingrich started using the debt limit as a weapon in 1995. He said that a new ceiling would not be passed until President Clinton made certain changes in the budget. Although Gingrich eventually backed down, he had done the damage and established the precedent.
Flash forward to today, and you will see Gingrich's legacy clearly! Speaker of the House Kevin McCarthy is using the debt limit as a bargaining chip to demand a major reduction in the new budget.
Russian Roulette!
The Republican Party is playing Russian Roulette, and that is a dangerous game. Without a new debt limit, a global financial crisis would be created. That is an unacceptable risk, without question. Therefore, it is high time for the United States congress to put in place a new strategy and a new system to balance the budget. Let's hope they do the right thing. Otherwise, that debt limit will cause us to lose sleep!
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