Mint explainer: US debt-ceiling agreement

• After months of tension and weeks of intense bargaining, the Biden administration and Speaker of the US House of Representatives Kevin McCarthy reached an agreement that would allow the US to raise its debt ceiling.
• The debt limit, introduced during World War I, dictates how much money the US government is allowed to borrow to pay off its debt and meet its Social-Security obligations, among other things. Raising the debt ceiling used to be a routine political affair. It currently stands at a whopping $31.4 trillion.
• However, the debt ceiling has become an increasingly divisive issue in American politics in recent years, as the Republican Party, which typically calls for controlling government spending and reducing the national debt, has instead sought to raise the debt ceiling. demanded concessions.
• This led to a pitched battle in 2011, when Republicans refused to raise the debt ceiling. The uncertainty caused by the fierce political battle that eventually ended in agreement led to a downgrading of the US credit rating for the first time.
• The issue comes to the fore again in 2023 as the US begins to approach its current debt limit. While President Biden called on Republicans to raise the ceiling and said he would not negotiate, Republicans demanded spending cuts in exchange for agreeing to raise the ceiling.
• As the political crisis dragged on, Treasury Secretary Janet Yellen said the country was close to running out of money. Without the ability to borrow more, America would be unable to service its debts, not to mention various government services.
• Because of the central role of the US dollar and the importance of US Treasury bonds in the global financial system, a US default on its debt would have disastrous consequences for the global economy.
• Eventually, Democrats and Republicans reached a compromise suspending the debt ceiling until January 2025. Meanwhile, government spending will remain flat next year, with the exception of defense spending, which will be allowed modest growth. In 2025, spending increases will be capped at 1%.
• Biden was largely able to protect social-security programs from cuts, including his signature student-loan-relief and climate-change bills. However, Republicans were able to ensure that there would be no new tax increases on wealthy citizens and stricter work requirements on food stamps.
• As President Biden said, neither side got exactly what they wanted. While Democrats initially insisted they would not negotiate with Republicans, they eventually came to the table. But Republicans were unable to secure the deep spending freeze they had hoped for. The deal will now go to a vote in the US Congress.

Updated: May 30, 2023, 03:28 PM IST