Can the US get rid of the debt ceiling? What would happen then?
The debt ceiling was put into place by Congress in 1917, so lawmakers could simply vote to take it off the books. But what consequences would that have?
The United States has narrowly avoided, yet again, going over a fiscal cliff when Congress passed legislation to suspend the debt ceiling getting it to President Biden’s desk to sign it into law just days before the X Date. This was just the most recent episode of brinksmanship using a default on the full faith and credit of the nation as a cudgel to extract political gains.
Failure to approve further borrowing to fully pay the bills would have meant economic calamity that would’ve roiled global markets and hurt everyday Americans. Make no mistake, the US has been racking up an ever-increasing amount of debt as the federal government spends more money than it takes in. Neither party is to fully blame for the current $31.4 trillion the nation owes to creditors.
That amount represents spending that Congress has approved under both Democrat and Republican presidents by Congresses held by both parties and it continues to grow without a balanced budget. So, why does the US have a debt ceiling, that if breached would cause a disaster, if lawmakers cannot get the nation’s financial house in order?
Can the US get rid of the debt ceiling?
Simply put, yes. Congress created the debt ceiling in 1917 to control spending when the US entered the fighting in World War I. It also simplified how the government borrowed, getting rid of the need for Congress to approve ever Treasury bond issue. So, lawmakers on Capitol Hill could just do away with the hand grenade that keeps getting its pin pulled out and tossed around until wiser heads prevail.
However, that is easier said than done in Washington DC. Lawmakers in Congress have called for abolishing the debt ceiling as some of those using it as a bargaining chip are becoming more and more oblivious to the consequences of a default, much less the cost of taking such brinksmanship to the very edge.
The 2011 debt crisis resulted in the US’ AAA credit rating being downgraded for the first time ever. The standoff is estimated to have cost a total of $1.3 billion for that fiscal year according to the Government Accountability Office (GAO) due to increased borrowing rates. That figure did not take into account additional costs for US Treasury securities after the 2011 fiscal year, nor consequences of the Treasury having to divert resources to focus on debt limit-related operations. Then there is the increased cost on car loans, mortgages and credit cards for average Americans too whose interest rates are tied to rates for US T-Bills.
It will be seen if the US credit rating, back at AAA status, will be downgraded once again. Fitch Ratings said that it was keeping the US credit rating on negative watch despite passage of the agreement which suspends the debt ceiling until January 2025.
In a statement the agency said: “Reaching an agreement despite heated political partisanship while reducing fiscal deficits modestly over the next two years are positive considerations.”
“However, Fitch believes that repeated political standoffs around the debt-limit and last-minute suspensions before the x-date (when the Treasury’s cash position and extraordinary measures are exhausted) lowers confidence in governance on fiscal and debt matters.”
What would happen if the US got rid of the debt ceiling?
One of the options that has been put forward is eliminating the debt ceiling, which essentially gives the Treasury carte blanche to borrow to pay for spending that Congress has approved.
Another would be that when federal spending is approved, to declare the necessary borrowing is automatically authorized at the same time as has been practiced under the Gephardt Rule from time to time by both parties.
Senate Minority Leader Mitch McConnell put forth an idea in 2011 which would have put raising the debt ceiling under the power of the US president. Congress would have the power to vote against it, which the president could veto. It would then be up to lawmakers on Capitol Hill to reverse that veto with a two-thirds majority vote.