What is the US debt ceiling?

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The US debt ceiling is a maximum limit set forth by the US lawmakers on the amount of funds that the US government can borrow by the sale of treasury bonds. Time and again the borrowing limit has been increased  as the governments spending far exceeds its revenues. The current limit of $16.7 trillion set by the Congress in the year 2011 had already been reached by the US government in May this year. However, post-this, the US government resorted to 'extraordinary measures' wherein it continued to borrow while still maintaining the debt-ceiling.

Why the US government needs to resort to such high-scale borrowing?

The scale of borrowing by the US government in comparison to the size of its economy began to increase since the1980s. Sub-prime crisis in the year 2007 further worsened the outlook and resulted in considerable spread between government revenues and expenditure. Since then the upper limit for borrowing or debt ceiling had been increased several times to allow the government to pay for its bills.

Why the debt-ceiling issue is significant?

The economists as well as investors are of the opinion that the issue of debt-ceiling is far more significant than perceived as on October 17, 2013 the US government will not be left with further measures to keep within the borrowing limit. Eventually, it will not be able to borrow any further funds to fund its deficit.

As per the Treasury department estimate the government would have $30 billion cash in hand on October 17 while its daily expenditure is $60 billion. So, while the government would continue to earn tax revenues it would not be in a position to pay its bills in full due for that day without further borrowing.

What can be the impact of the debt-ceiling crisis?

Though exact outcome cannot be anticipated, economists in view of the similar situation in the year 2011, suggest that the prolonged debate over the expansion of the debt-ceiling and its deferment until the last moment has the potential to trigger a global financial crisis.

According to the reports released on Thursday, the US Treasury department said that the debt-ceiling impasse could result in credit markets to freeze, the dollar to plummet and interest rates to rise precipitously.


Story first published: Saturday, October 5, 2013, 9:42 [IST]
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