US debt ceiling: Why the government of the USA may go bankrupt soon?

The US government may soon run out of money unless it allows itself to borrow more. On May 16, US President Joe Biden met the US House of Representatives speaker, Kevin McCarthy, to resume negotiation

Raghav Aggarwal New Delhi
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The debt ceiling is a law that limits the total amount of money the US government can borrow to pay its bills. This includes paying for the military, social security, and federal employees, as well as the interest on the national debt and tax refunds.
The US debt ceiling is currently capped at $31.4 trillion. The limit was breached in January, but the Treasury Department used "extraordinary measures" to provide more cash to the government.

Earlier, US treasury secretary Janet Yellen said that without additional borrowing, the US would not have enough money to meet its financial obligations from June 1.
Why was the ceiling imposed?

The ceiling was first imposed in 1917, allowing the US Treasury to issue bonds and raise money without Congressional approval as long as the total falls under the debt ceiling. The ceiling is imposed to keep a check on the spending by the US government.
In several years in the past, including 1995, 2011, 2013 and then in 2021, political disputes have risen on the Treasury advising the Congress that the debt ceiling is about to be reached and a default is imminent.

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This year too, it has become a political flashpoint. President Biden had to cancel his Quad meeting, which was scheduled to be held in Australia.
What happens if the ceiling is not raised?

If the ceiling is not raised, the US government cannot raise more money. It will not be able to pay salaries to federal and state employees or pensions to pensioners in the US. Moreover, companies that depend on the government for funds cannot borrow more.
The US government may also be unable to pay the interest due on its debt, putting the country into default. The last time the US entered a default was in 1979. 

A long-term impact of the non-payment of interest would be that investors will start seeing US debt as risky and raise interest rates. This could trickle down the economy and make all types of borrowing costlier.
According to a report by Moody's, if the ceiling is not raised, the US stocks may fall by almost a fifth, and the economy may contract by up to 4 per cent. This may also lead to a loss of seven million jobs.

The US, however, has not breached its debt ceiling to date.
What is the 14th Amendment?

Some people have also urged Biden to invoke the 14th Amendment in the US Constitution. It states that the "validity of the public debt of the United States...shall not be questioned". Biden said he was considering it, but it may lead to a legal battle. Yellen said that it may spark a constitutional crisis.
What's next for the US?

In April, the Republicans forwarded a deal to suspend the debt limit by $1.5 trillion or until March 31. They proposed that, in return, the spending on key agencies can be kept at 2022 levels during the current financial year. However, they will have to repeal incentives in certain areas, including tax benefits for electric vehicles.

First Published: May 17 2023 | 4:56 PM IST

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