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Washington politicians are playing a risky game. The government of the world’s largest economy is on the brink of default because the US Congress failed to raise the debt ceiling. So the Treasury Department is not allowed to take on new debt to pay the US government bills.
The USA already reached the existing debt ceiling of 31.4 trillion dollars in January. Since then, the USA has only been able to meet its financial obligations thanks to “extraordinary measures”. Treasury Secretary Janet Yellen warns that after June 5, the United States will probably no longer be able to settle all the bills.
Necessary majority is not guaranteed
At stake are pensions for retirees, wages for federal employees, spending on the military or interest payments on US Treasury bonds, which form a central building block for the global financial system. Yes, President Joe Biden and Kevin McCarthy, who leads the Republican majority in the House of Representatives, have agreed and want to raise the debt ceiling for two years. In return, as a concession to the Republicans, individual spending items are being cut or capped.
But time is short. The parliamentarians in both chambers, the Senate and the House of Representatives, have to vote on it. There is no guarantee that the necessary majorities will be in place. The agreement probably includes too few spending cuts for the Republicans on the right-hand edge, and too many for the Democrats on the far left. It remains a dance on the abyss.
Debt ceiling as leverage
It is a peculiarity of the USA that Parliament decides on spending and then, in a second step, has to authorize the necessary debt. What has long been routine, raising the debt ceiling, has been discovered by Republicans as a bargaining chip to force Democratic presidents to cut spending. They point to the national debt: Most recently, the budget under President Bill Clinton was balanced, and since then income and expenditure have diverged ever further. The result is a national debt, caused by Democratic presidents as well as Republican ones, that amounts to more than 120 percent of the gross domestic product. Switzerland is around 40 percent.
As things stand today, around 2050 the USA will have to spend around half of its income to pay interest on its debt. It’s understandable that Republicans are concerned. But the Democrats accuse them of double standards: Under Donald Trump, who fueled debt with his tax cuts, they raised the debt ceiling three times without conditions. Democrats say it’s appropriate to talk about cuts during budget negotiations, not when it comes to paying bills.
Only the immediate crisis averted
It is an expression of the highly polarized US policy that the debt ceiling has become a means of exerting pressure. It is a policy of very narrow majorities, which has a dysfunctional effect time and time again, i.e. it is incapable of solving major problems. Because even if Congress decides to raise the debt ceiling, this will only avert the immediate crisis. Washington could soon be dancing on the abyss again. At some point, Washington could stumble and slide into default for the first time. The consequences of this are unclear, but they are likely to be catastrophic for the global economy.