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Picture this: a nation on the brink of a financial precipice, where partisan ideology and fiscal responsibility clash in a high-stakes game of brinkmanship. It's a nail-biting struggle, complete with soaring tension, uncertain outcomes and a marathon of negotiations where progress is elusive as spring weather in Evanston.

This is emblematic of the deepening crisis over federal spending limits embroiling the United States since it hit its debt ceiling in late January 2023. The issue is even more urgent as June 1 approaches, which has been deemed as the “hard deadline” for the U.S. to raise the ceiling or risk of defaulting on its financial obligations.

But what exactly is the debt ceiling, and why does it spark such intense political wrangling? Where does it come from and why is it important to understand? NBN sheds light on this critical issue and delves into key questions surrounding the U.S. debt ceiling crisis.

What is the U.S. debt ceiling?

The debt ceiling is a statutory limit on the amount of debt the federal government can accumulate. The limit is determined by Congress, and is currently set at $31 trillion.

The debt limit strains relations between the White House and Republicans. The Biden administration seeks to increase the limit without conditions, while Republicans have leveraged their House majority to stipulate federal spending reductions to allow for a debt ceiling increase. The Republican-led House passed a bill in April that would allow for suspension of the debt ceiling if federal spending is cut 14% over the next decade.

The debt ceiling emerged during World War I as a brake on the huge, unplanned increase in borrowing that the government launched to fund the expensive war. Since then, the debt ceiling serves as a check on the government's borrowing authority; issuing new debt was now constrained by the required legislative approval.

In theory, the purpose of the limit is to ensure fiscal discipline and promote responsible government spending. When the debt ceiling is reached, the U.S. Treasury must obtain majority approval by both chambers of Congress to raise it, which would allow the government to continue borrowing and avoid a default (explained in the next section).

What could happen on/after June 1?

As the calendar inches closer to June 1, the “hard deadline” set by the U.S. Treasury, there are several potential outcomes regarding the trajectory of the crisis. This pivotal moment brings at least three distinct possibilities into focus: a “clean” debt ceiling increase, the Republican-debt limit plan or a U.S. default. Here’s a glimpse into the potential paths that lie ahead.

About 52% of Americans favor the “clean” increase pressed by President Biden, according to an NPR-PBS NewsHour-Marist national poll. This means lawmakers would agree to raise the debt limit without attaching any additional conditions or policy measures. This approach aims to first ensure the government's ability to meet its financial obligations and avoid default; negotiations surrounding spending and budget would be deliberated after.

Alternatively, the House Republicans – partly aggrieved by the contingent increase in debt caused by the pandemic – call for a plan that conditions spending cuts and tightens requirements for government benefit programs. They disagree with what they view as the Democrat’s “short-term” solution.

However, both parties’ firm stances on their respective plans has resulted in unproductive negotiations and multiple breakdowns in debt ceiling talks. The worst-case scenario? Negotiations continue to remain in gridlock and no agreement is made. The U.S. would then have to default on its financial obligations, meaning it would essentially miss payments to creditors and be rendered unable to borrow.

Northwestern Associate Professor of Political Science Stephen Nelson, whose research focuses on international and comparative political economy, explains that this would have far-reaching consequences both domestically and globally. The default would further downgrade the nation’s credit rating, and its impacts would ripple through the economy, affecting everything from government programs and services to financial markets and investor confidence.

“The default throws that into some degree of chaos, and accelerates what looks like a kind of emerging recession,” Nelson said.

Some published reports estimate that even a short-term debt-limit breach would result in a decline in real GDP and almost 2 million lost jobs. The unemployment rate could increase from its current level of 3.5% to 5%.

Has this problem existed historically?

Since WWI, Congress has usually been able to act quickly and unanimously to increase the ceiling when the government hits its limit. From 1979 to 2011, the Gephardt Rule allowed the House to automatically raise the federal debt limit, without requiring the separate vote needed today.

Up until 2011, it was not the norm to use the debt ceiling as a tool to hold the government hostage. The Obama administration’s disastrous midterm election for Democrats in the House and Senate fueled the formation of a hyper-conservative Tea Party coalition, worried about increases in debt produced by the bailouts distributed in the wake of the 2008 financial crisis. In 2011, the administration was pressured into agreeing to cuts in social spending by the group of conservatives who saw the debt ceiling as a means to hold the government hostage, according to Nelson.

“It manifested in a downgrade in the U.S. credit rating; the U.S. lost its triple-A credit rating,” Nelson said. "The Obama administration buckled and cut a lot of entitlements and social spending in order to get the leadership of the Republican Party to wrangle enough votes to let the debt ceiling be increased, which used to be obligatory and kind of automatic.”

Now, the country has shifted in its legislative partisan composition under a Democratic president: The 2022 midterm elections, although not as disastrous for Democrats as 2011’s, have brought in more Republicans who have shifted further right regarding issues like the increase in debt and spending caused by COVID-19.

What is unique about this particular crisis?

Currently, the U.S. stands at its highest debt-to-GDP ratio (the debt relative to the size of the economy) in American history, which serves as a major point of concern for House Republicans. The ratio has remained high since 2020, due to huge reductions in GDP from lockdowns and massive spending bills brought on the pandemic. However, Nelson noted that looking at debt-to-GDP on its own is “meaningless.”

The U.S. is not the only country with a debt-to-GDP ratio exceeding 100%, according to the International Monetary Fund. Japan, with its high “debt mountain,” has not seen signs of significant economic crises. When the U.S. debt-to-GDP ratio hit 100% in 2021, market players didn’t seem too concerned. Further, as the issuer of the world's reserve currency, the U.S. maintains a strong position and enjoys a seemingly insatiable appetite for U.S. dollars globally.

For these reasons, Nelson explained that he sees the issue of the debt ceiling as more of an “ideological commitment.” The absence of market pressure or a decline in confidence in the U.S. economy eliminates the imperative for spending cuts.

“I don't see any external pressure which signals that we have to somehow reduce or extinguish that debt,” Nelson said. “And that's why I was kind of suggesting that this is sort of deeply rooted in American political culture, which is some kind of almost moral objection to having excessive amounts of debt.”

If the plan is to reduce the U.S. debt-to-GDP ratio, increasing GDP – through economic growth or inflation – is crucial and shouldn't be overlooked. In fact, this ratio has been decreasing as both growth and inflation are at play, raising the GDP. However, the proposed Republican plan to cut entitlement spending could hinder and backtrack growth, causing the debt-to-GDP ratio to rise.

Let’s say the debt ceiling is raised, does that solve the problem?

Raising the debt ceiling allows the government to continue borrowing money to meet its financial obligations and will provide a short-term solution to avoid the immediate consequences of default. While it may provide temporary relief, it is still not a comprehensive solution as the root of the issue lies in the deep-seated political polarization that permeates the decision-making process.

“This [situation] is self-inflicted and is internal to the American political situation, which is what makes it very fraught,” Nelson said.

The need to raise the debt ceiling periodically highlights the structural issues and extreme divisiveness within the U.S. political landscape. The polarization between political parties often leads to gridlock and obstructs effective long-term fiscal planning. The debt ceiling has now become a battleground for ideological conflicts and partisan standoffs, rather than a platform for constructive dialogue on the nation’s fiscal responsibilities.