Americas

US enters new year with debt ceiling back on agenda

US President-elect Trump beset by unresolved debt ceiling decision by GOP-led Congress, calling out former Speaker McCarthy’s suspension as ‘one of dumbest political decisions made’

Dilara Zengin  | 02.01.2025 - Update : 02.01.2025
US enters new year with debt ceiling back on agenda

WASHINGTON

The US entered the new year with the debt ceiling back on agenda of the Congress, as it determines the maximum amount the federal government can borrow and poses a great risk to the country’s economy.

The US’ debt reached $36.1 trillion -- the US risks going into default if the Congress fails to reach a new agreement on the debt ceiling, which could lead to volatility in the global markets, a downgrade of the country’s credit rating, and further economic uncertainty.

President-elect Donald Trump wished to enter the new year by eliminating the debt ceiling concerns, requesting Republican-led Congress to include a debt limit provision in the provisional budget bill of the Congress.

Republicans and Democrats were only able to agree on a temporary budget that would fund the government until March.

Janet Yellen, the secretary of the Treasury, urged Congress to take action on the debt ceiling to preserve the country’s credit in a letter, saying that the new debt ceiling will be set on Thursday.

Yellen noted that the US’ outstanding debt is expected to decline by about $54 billion largely due to the scheduled payment of certain securities held by a federal trust fund linked to Medicare payments and that the Treasury will not need to take extraordinary measures with the temporary reduction of the debt.

She added that the new debt ceiling will be reached between Jan. 14-23.

On his Truth Social platform, Trump accused former Speaker of the House Kevin McCarthy of voting in 2023 to suspend the debt ceiling until Jan. 1, 2025, calling it “one of the dumbest political decisions made in years,” and said the debt ceiling was to be President Joe Biden’s problem and not his when he takes office.

In early 2023, the US federal government reached a debt ceiling of $31.4 trillion, leading to a crisis. The Treasury put in place some extraordinary measures to prevent the economy from defaulting, in the form of investments in the Civil Service Retirement and Disability Fund and the Postal Service Health Benefits Fund.

Congress passed a bill in June 2023 to limit some spending and suspended the debt ceiling until Wednesday after months of negotiations.

The debt ceiling, also called the debt limit, was first imposed in 1917. Congress approves a budget every year, including the federal government spending on infrastructure, social security programs, and salaries for federal employees.

The resources to pay for these expenditures is sourced from taxpayer money. The US has been spending more than it generates in revenue, which increases the budget deficit.

The US government needs to borrow money to continue the payments that Congress already approved, and the debt limit sets the total amount of debt the federal government can borrow to pay the bills. The Treasury is authorized to borrow as much as the limit.

When the debt ceiling is reached, the federal government cannot borrow more and it can only spend cash on hand and its incoming revenue. Increasing the limit would require the will of Congress, as Congress can choose to raise or suspend the debt ceiling for a period of time when faced with a decision.

The Treasury can take extraordinary measures to ensure that the federal government meets its financial obligations, though those only buy time and do not involve measures large enough to prevent reaching the debt limit.

Despite not being related to government spending, the debt ceiling became a key issue in the debate over the size of the federal budget. Politicians seeking to reduce deficits or limit the budget use the debt ceiling to negotiate spending and budget constraints.

Analysts warn that going over the debt ceiling would seriously damage the US economy, while even the uncertainty over the debt ceiling is putting enough pressure on investors and stocks.

In 2011’s spending dispute between former President Barack Obama and the Republicans in Congress led to a prolonged stalemate, as Congress reached an agreement to raise the limit just two days before the Treasury was expected to run out of cash, leading markets to experience the most volatile week since the 2008 financial crisis, and consequently, the US’ credit rating by Standard & Poor’s was downgraded for the first time.

According to experts, a possible default in the US economy could upset the economy and markets, causing bond interest rates and borrowing costs to rise, which could seriously affect the global economy.

* Writing by Emir Yildirim in Istanbul.

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