How funny that the United States should be one of the handful of countries with a debt ceiling. With the dollar working as the world’s reserve currency, America can get away with sloppier spending than we can on this side of the pond.
Yet it is the US that is forced to reckon with its colossal debt on an increasingly frequent basis, as the debt ceiling has become another event in the political calendar for Republicans and Democrats to go head-to-head: the former insisting on deficit reduction, the latter refusing to link any talk of future spending cut to this round of debt ceiling talks.
The concept was shaped during the First World War to, ironically, give the Treasury more flexibility to manage (and rack up) debt. Now it’s used for political sparring. There was a time, not so long ago, where the Republican chant to slash spending was seen as genuine. But the party’s willingness to hike the ceiling when Donald Trump wanted to spend big is not so easily forgotten.
Meanwhile the Democrats continue to see taxpayer cash not much more than play money, as President Joe Biden casually throws a trillion dollars in one direction, then another.
The debt ceiling exposes both these stances as callous and careless, albeit due to technicalities in US legislation: the trillions of dollars being spent each year by the federal government have already been approved through separate legislation.
The debt ceiling determines whether the Treasury has the right to borrow what is needed to make up the gap between Congress’s spending pledges and taxpayer revenue. In other words, the Treasury has been told to spend the money, but has not been told yet that it can access the money. This is where the battle plays out.
Debt-ceiling showdowns are, in large part, for show – albeit a show that feels as though the lights and sets could come crashing down at any moment, causing real damage. A debt ceiling clash has never led the US to default of its debt payments – yet.
But as the Treasury scrambles to put together “extraordinary measures” to keep paying the bills, one has to wonder: with American politics as polarised as it currently is, might this debt ceiling debate be the one that tumbles over the cliff-edge?
After all, damage has been done in the past. Back in 2011, when Barack Obama found himself at odds with a Republican-controlled House demanding spending cuts, the debt-ceiling debate was heightened to a point where the US had its credit rating downgraded. The longer politicians carry on the debate, the more likely it is investors will get nervous, and perhaps demand a bigger return on their bonds.
There’s hope for stability, not least because of Biden’s history with these kinds of negotiations. When Obama found himself struggling to make headway with the House, he’d send in his Vice President to sort things out.
But the instability that’s caused in the meantime, while uncomfortable, has its benefits – not just for America but for the rest of the world. The US’s discussions over its debt pile should get everyone thinking about their own country’s financial situation, and the extent to which ever-growing spending promises are weighing down economies.
America’s $31 trillion (£25 trillion) federal debt has seen its gross government debt as a percentage of GDP rise to more than 128pc. Meanwhile, the government’s annual spending as a percentage of GDP nears 40pc as government gobbles up the resources that make the economy go round.
It’s a similar, if not worse, story across advanced economies. In the G7, only Germany has gross debt levels as a share of GDP under 100pc. Meanwhile the US is at the bottom of the list for government spending as a share of GDP: from Canada at 40.7pc up to France not far off 60pc, governments are soaking up more and more money to try to make good on increasingly unsustainable commitments.
When they fall short, they borrow the rest, eventually adding on to mega-debt piles that are causing debt-interest payments to soar. In Britain, public sector net borrowing hit £27.4bn last month, a December record, largely driven by a staggering £17.3bn debt servicing bill.
Yet unlike in America, where this comes to a head every few years, we don’t have such routine debates in the UK. It’s considered a given that if the Government commits to spending more money, it will simply borrow to do so.
So the flaws in this kind of thinking are revealed in less structured, rather brutal ways: the most recent and prominent example being last autumn, when Liz Truss and Kwasi Kwarteng planned to add tens of billions of pounds to the nation’s deficit, with little consideration for the deficit already hovering at record levels for peace time, while the gross national debt had crossed the line to over 100pc of GDP.
Markets were not convinced by the plans, and reacted accordingly, demanding higher returns for what they saw as riskier investments.
We went through a brief period where virtually everyone, even Labour, seemed to agree that the era of cheap money was over and borrowing needed to be curbed. But memories are short these days, and already that lesson seems to have fallen by the wayside, as the Tory party is back to fighting over unfunded tax cuts, while Labour keep using the same pot of money (think abolishing non-domiciled tax status) over and over to pay for various pledges.
There is merit, then, in having some kind of event baked into the political calendar (not one borne from chaos) in which politicians are confronted with the ugly figures and forced to engage with them.
It’s by no means a silver bullet solution. America has been ramping up the debt ceiling debate in recent years, and yet successive governments keep racking up the debt. But there’s a forced honesty that comes with having to acknowledge the dire financial situation one’s country is in. It’s not much, but it’s a starting point.
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