As seems to happen every couple of years at this point, Capital Hill is abuzz with discussions of whether the U.S. will default on its debt. In fact, if the debt ceiling isn’t raised this summer — potentially as early as June — the U.S. will default for the first time. With Republicans in control of the House and Democrat Joe Biden sitting in the Oval Office, the raising of the ceiling — which, at one point, was a pro forma vote without any controversy — the horns of partisan conflict are blowing loudly. While most people understandably tend to tune out the grandstanding of D.C. muckety-mucks, this is one issue that has the potential to have a big impact on your finances.
For help managing your money no matter what happens in Washington, consider working with a financial advisor.
Debt Ceiling Basics
Before you look at the current situation, it’s helpful to understand exactly what the debt ceiling is and how it works.
First, understand that the U.S. regularly borrows money from myriad creditors to pay for all of its expenditures, from social programs to the military. That’s because the federal government spends more than it takes in.
Second, there is a federal law limiting the amount of debt that the U.S. can take on. This is not in the constitution; the origins of the debt ceiling only go back to the early 20th century. Every few years, that limit has to be raised so that the federal government can meet all of its obligations — including paying back interest on existing debts.
If the debt ceiling isn’t raised, there would be serious risk of the U.S. defaulting on its loans, which could have wide ranging and global consequences, including potentially devaluing the dollar, which would impact not just just the economy but the personal finances of every American.
What’s Going on Now?
As we move further into 2023, the debt ceiling debate is once again at the forefront of conversations for both politicians and financial types.
Notably, House Speaking Kevin McCarthy (R-Calif.) is attempting to use the looming crisis as a way to make big political wins against President Biden and the Democrats. He recently introduced a new bill called the Limit, Save, Grow Act of 2023, which would raise the debt ceiling by $1.5 trillion for about a year. As you may have guessed, though, this is not a simple up-or-down vote on raising the debt ceiling. Instead, McCarthy attached that move to a bill that takes aim at several of Joe Biden’s signature policies — and which would, according to McCarthy, save Americans around $4.5 trillion.
Among the potential cuts McCarthy’s bill proposes are eliminating Biden’s move to relieve some student debt, retrieve funds that were distributed but went unused during the pandemic and hire thousands of new agents for the Internal Revenue Service. It would also roll back some of the climate measures the Biden administration has put in place.
As of right now, it seems like the Biden administration is unlikely to agree to many — if any — of the demands McCarthy and the Republican caucus are making. Thus, this showdown is essentially an old-fashioned game of chicken.
The Bottom Line
With the federal government set to hit its debt limit by June 2023, both parties are preparing for another round of partisan warfare over the debt ceiling. The Republicans just sent a shot across the bow of Joe Biden and the Democrats, saying they’d agree to raise the ceiling as part of a bill that also does serious damage to Biden’s policy goals and reduces spending by trillions of dollars.
Financial Planning Tips
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