The United States debt-ceiling crisis was a political debate in the United States Congress about increasing the United States debt ceiling that resulted in a financial crisis. The crisis ended when a complex deal was reached that raised the debt ceiling and reduced proposed increases to future government spending, although similar debates are possible for future budgets. As part of the aftermath, the crisis had a major political impact in the United States, in which public support for Congress fell dramatically. President Barack Obama and Speaker of the House John Boehner announced on July 31 that an agreement had been achieved. After the legislation was passed by both the House and Senate, President Obama signed the Budget Control Act of 2011 into law on August 2, the date estimated by the department of the Treasury that the borrowing authority of the US would be exhausted.
Four days later, on August 5, the credit-rating agency Standard & Poor’s downgraded the credit rating of US government bond for the first time in the country’s history. Markets around the world as well as the three major indexes in the US then experienced their most volatile week since the 2008 financial crisis with the Dow Jones Industrial Average plunging for 635 points (or 5.6%) in one day. Yields on US Treasuries, however, dropped as investors, anxious over the dismal prospects of the US economic future and the ongoing European sovereign-debt crisis, fled into the safety of US government bonds and bonds of other safe haven economies. Moody’s and Fitch, however, have retained America’s credit rating at AAA. The Government Accountability Office (GAO) estimated that the delay in raising the debt ceiling increased government borrowing costs by $1.3 billion in 2011 and also pointed to unestimated higher costs in later years. The Bipartisan Policy Center extended the GAO’s estimates and found that delays in raising the debt ceiling would raise borrowing costs by $18.9 billionUnder US law, an administration can spend only if it has sufficient funds to pay for it. These funds can come either from tax receipts or from borrowing by the United States Department of the Treasury. Congress has set a debt ceiling, beyond which the Treasury cannot borrow. The debt limit does not restrict Congress’s ability to enact spending and revenue legislation that affects the level of debt or otherwise constrains fiscal policy; it restricts Treasury’s authority to borrow to finance the decisions already enacted by Congress and the President. Congress also usually votes on increasing the debt limit after fiscal policy decisions affecting federal borrowing have begun to take effect. In the absence of sufficient revenue, a failure to raise the debt ceiling would result in the administration being unable to fund all the spending which it is required to do by prior acts of Congress. At that point, the government must cancel or delay some spending, a situation sometimes referred as a partial government shut down.
In addition, the Obama administration stated that, without this increase, the US would enter sovereign default (failure to pay the interest and/or principal of US treasury securities on time) thereby creating an international crisis in the financial markets. Alternatively, default could be averted if the government were to promptly reduce its other spending by about half.
An increase in the debt ceiling requires the approval of both houses of Congress. Republicans and some Democrats insisted that an increase in the debt ceiling be coupled with a plan to reduce the growth in debt. There were differences as to how to reduce the expected increase in the debt. Initially, nearly all Republican legislators (who held a majority in the House of Representatives) opposed any increase in taxes and proposed large spending cuts. A large majority of Democratic legislators (who held a majority in the Senate) favored tax increases along with smaller spending cuts. Supporters of the Tea Party movement pushed their fellow Republicans to reject any agreement that failed to incorporate large and immediate spending cuts or a constitutional amendment requiring a balanced budgetIn the United States, the federal government can pay for expenditures only if Congress has approved the expenditure in an appropriation bill. If the proposed expenditure exceeds the revenues that have been collected, there is a deficit or shortfall, which can only be financed by the government, through the Department of the Treasury, borrowing the shortfall amount by the issue of debt instruments. Under federal law, the amount that the government can borrow is limited by the debt ceiling, which can only be increased with a separate vote by Congress.
Prior to 1917, Congress directly authorized the amount of each borrowing. In 1917, in order to provide more flexibility to finance the US involvement in World War I, Congress instituted the concept of a “debt ceiling”. Since then, the Treasury may borrow any amount needed as long as it keeps the total at or below the authorized ceiling. Some small special classes of debt are not included in this total. To change the debt ceiling, Congress must enact specific legislation, and the President must sign it into law.
The process of setting the debt ceiling is separate and distinct from the regular process of financing government operations, and raising the debt ceiling does not have any direct impact on the budget deficit. The US government passes a federal budget every year. This budget details projected tax collections and outlays and, therefore, the amount of borrowing the government would have to do in that fiscal year. A vote to increase the debt ceiling is, therefore, usually seen as a formality, needed to continue spending that has already been approved previously by the Congress and the President. The Government Accountability Office explains: “The debt limit does not control or limit the ability of the federal government to run deficits or incur obligations. Rather, it is a limit on the ability to pay obligations already incurred.” The apparent redundancy of the debt ceiling has led to suggestions that it should be abolished altogether.
The US has had public debt since its inception. Debts incurred during the American Revolutionary War and under the Articles of Confederation led to the first yearly report on the amount of the debt ($75,463,476.52 on January 1, 1791). Every president since Harry Truman has added to the national debt. The debt ceiling has been raised 74 times since March 1962, including 18 times under Ronald Reagan, eight times under Bill Clinton, seven times under George W. Bush and three times (as of August 2011) under Barack Obama.
As of May 2011, approximately 40 percent of US government spending relied on borrowed money. That is, without borrowing, the federal government would have had to cut spending immediately by 40 percent, affecting many daily operations of the government, besides the impact on the domestic and international economies. Treasury can determine what items would be paid. The Government Accountability Office reported in February 2011 that managing debt when delays in raising the debt limit occur diverts Treasury’s resources away from other cash and debt management responsibilities and that Treasury’s borrowing costs modestly increased during debt limit debates in 2002, 2003, 2010 and 2011. If the interest payments on the national debt are not made, the US would be in default, potentially causing catastrophic economic consequences for the US and the wider world as well. (Effects outside the US would be likely because the United States is a major trading partner with many countries. Other major world powers who hold its debt could demand repayment.)
According to the Treasury, “failing to increase the debt limit would . . . cause the government to default on its legal obligations – an unprecedented event in American history”. These legal obligations include paying Social Security and Medicare benefits, military salaries, interest on the debt, and many other items. Making the promised payments of the principal and interest of US treasury securities on time ensures that the nation does not default on its sovereign debt.
Critics have argued that the debt ceiling crisis is “self-inflicted,” as treasury bond interest rates were at historical lows, and the US had no market restrictions on its ability to obtain additional credit. The debt ceiling has been raised 68 times since 1960. Sometimes the increase was treated as routine; many times it was used to score political points for the minority party by criticizing the out-of-control spending of the majority. The only other country with a debt limit is Denmark, which has set its debt ceiling so high that it is unlikely to be reached. If raising the limit ceases to be routine, this may create uncertainty for global markets each time a debt ceiling increase is debated. The debt-ceiling crisis of 2011 has shown how a party in control of only one chamber of Congress (in this case, Republicans in control of the House of Representatives but not the Senate or the Presidency) can have significant influence if it chooses to block the routine raising of the debt limit.