The US public debt ceiling is an important and multifaceted economic issue that can cause a crisis if not promptly controlled.
What is the public debt ceiling?
The public debt ceiling is the limit at which a country’s government* can borrow through bills and bonds to pay its financial obligations. This portion of debt arises when the government’s revenue (mainly from taxes) is not sufficient to meet all spending needs.
This financial obligation can include activities such as building infrastructure, maintaining public services, and providing social support.
The U.S. Treasury Department. Source: The New York Times
The public debt ceiling is an important limit to determine the financial capacity of the government, ensure financial management and ensure the economic stability of the country. When public debt reaches the ceiling, the National Assembly must increase this limit or take measures to reduce spending or increase government revenue to avoid default.
The debt ceiling was set by the US Congress in 1917 to curb uncontrolled spending by government agencies.
The US public debt meter in Manhattan, New York in November 2022. Photo: Patti McConville
Based on data from the World Bank (WB), the US Department of Treasury and the US Congressional Research Service, the US government’s public debt ceiling has increased sharply in recent years, reaching a total of 31.46 trillion USD in May 2023. This puts the US in the position of the highest public debt in the world.
In particular, the United States is often used in legal documents, and the US federal government can also be referred to as the US government for short, so in this article, the concept will be shortened to ceiling. US public debt.
What is debt?
Debt is a financial liability that a borrower must pay to the lender. Debt applies to individuals, businesses, and governments when they borrow money to spend or invest.
Examples of personal debt include using a credit card, taking out a loan, or getting a loan to buy a home. Similarly, businesses can borrow money through forms such as lines of credit or corporate loans.
When spending exceeds revenue representing a deficit, a cumulative deficit over time represents an individual’s total debt.
Like individuals and businesses, governments can also have debt, known as public debt. This is the money the government borrows to pay its expenses.
In the case of the US, public debt is mainly held by people and institutions in the country. A small portion of the public debt will be held by foreign governments, banks and other investors.
Holding here means that the US government issues bonds, government debentures or other loan programs/mechanisms to borrow money or what can be called investment attraction. In return, the lender will receive the agreed-upon interest and principal amount.
What does the US government spend?
Fiscal year (also known as fiscal year, budget year) in English is Fiscal year or Financial year, abbreviated as FY.
Fiscal year is a concept in finance and accounting, especially used by organizations and governments to define time periods in the management of revenues and expenditures and financial reporting.
It usually does not coincide with the regular calendar year but is started from a specific date and lasts for 12 months. Government spending will be calculated in a fiscal year. The fiscal year of the US government runs from October 1 of the previous year to September 30 of the following year.
The U.S. government spends money on a variety of goods, programs, and services to support the economy and people. Part of this includes interest payments arising from public debt borrowed by the government. As public debt increases, so does the amount paid for interest.
If the government spends more than it takes in from taxes, there will be a budget deficit. Conversely, if the government spends less than it takes in, there will be a budget surplus. In fiscal year 2022, the government spent a total of $6.27 trillion, or 25% of total GDP, more than it took in, resulting in a deficit.
US government spending in 2022. Source: FiscalData.Treasury.gov
Government spending covers everything from Social Security and Medicare to military equipment, highway maintenance, construction, research and education. This spending can also be classified according to the object and purpose in the budget.
This expenditure can be divided into two main categories:
Object class: expenditures that the government has no choice but to spend to meet its mandates and responsibilities. For example, the payment of salaries and allowances for state officials, basic medical expenses, social allowances, and expenses as prescribed by law.
Mandatory spending in the US from January 1, 2023 to March 31, 2023. Source: USASPENDING.gov
Voluntary expenditures are expenditures that are not required by law and can be adjusted or changed according to government priorities and policies. For example, spending on research and development, education programs, infrastructure spending, and other expenditures that are not required by law..
US voluntary spending from January 1, 2023 to March 31, 2023. Source: USASPENDING.gov
The reason why the US public debt is increasing
Debt incurred during the American Revolution amounted to more than $75 million as of January 1, 1791. Over the next 45 years, debt continued to grow. By 1835 the debt had fallen dramatically due to the sale of national land and cuts to the federal budget.
During the American Civil War, from 1860 to 1865, debt increased more than 4,000% from $65 million to $2.7 billion. Debt continued to grow steadily into the 20th century and to around $22 billion after the country financed World War I.
Some of the events that caused the US public debt to increase significantly include the wars in Afghanistan and Iraq, the 2008 global economic crisis, and the COVID-19 pandemic.
Currently, the US government’s deficit mainly comes from 3 main reasons:
The aging of the baby-boomer generation (those born between 1946 and 1964): the aging population is growing rapidly. In 2010 there were 40.5 million people, in 2020 this number is already 56.1 million people.
Health care costs are on the rise: The US pays for a health check-up per citizen of $12,318 per year. This is the largest number and far away from the second place is Germany with 7,383 USD.
The tax system is not enough to meet the government’s commitments to citizens: in 2022, the US spent more than 6.3 billion USD, but only collected about 4.9 billion USD. US revenue mainly comes from tax collection. However, since 2001, the US has introduced many policies to cut taxes.
The Corona pandemic has exacerbated the unsustainable financial situation, both due to its devastating impact on the economy and the necessary regulatory measures.
As of May 2023, the US debt per capita has reached $ 94,142, according to statistics from FiscalData.Treasury.gov.
US debt/GDP “health situation”
Comparing a country’s debt to its gross domestic product (GDP) reveals the country’s ability to repay its debt.
Just looking at the amount of national debt that is not linked to the national economy is not enough to assess the financial situation of a country. Just looking at the amount of debt without considering the country’s ability to repay it would miss an important part of the big picture.
The debt-to-GDP ratio is an important indicator because it compares the amount of debt to the economic output of a country. If this ratio is high, it may indicate that the country has a large amount of debt relative to its financial capacity. Conversely, if this ratio is low, it can indicate that the country has a good debt repayment capacity.
Since 2013, the US debt-to-GDP ratio has surpassed 100%. When the debt-to-GDP ratio exceeds 100%, it means that the national debt exceeds the value of the country’s economic output. It can be seen that the US is carrying a large debt burden and may face difficulties in debt management and repayment.
Going beyond 100% also raises questions about America’s ability to repay its debt and create a sustainable financial environment in the future. This may require economic policies and measures to contain rising debt and strengthen the financial viability of the country.
According to the Peterson Foundation’s prediction, in the coming time, the US debt/GDP ratio will continue to increase sharply. It is expected to reach about 195% by 2053, meaning debt is almost twice the national GDP. This is an unbelievable number!
Where does the government borrow debt?
The US government borrows through the issue of government bonds and other debt instruments. In addition, the US government can also use other debt instruments such as Savings Bonds and government securities that represent debt between government agencies.
Some other countries have also borrowed from international organizations such as the International Monetary Fund (IMF), the World Bank and private financial institutions to meet their capital needs.
Here are some of the methods the US government uses to borrow money:
Treasury Bills: These are short-term bonds, usually with maturities ranging from one month to one year.
Treasury Notes: These are medium-term bills, with maturities ranging from one to ten years.
Treasury Bonds: These are long-term bonds, with maturities of ten years or more.
Treasury Inflation-Protected Securities (TIPS): These are bonds whose value changes with the level of inflation. The government issues TIPS to protect the value of the loan against the effects of inflation.
Floating Rate Notes (FRNs): These are bills with interest rates that vary according to the market. The US government issues FRNs to adjust the interest rates paid to investors according to market conditions.
Consequences of the US public debt reaching the “ceiling”
Reaching the public debt ceiling could cause a lot of harm to the US government and this country. Consequences of increasing public debt in the US can cause the following problems and impacts:
High interest cost
As public debt increases, the government has to pay more in interest. This creates a large financial burden and limits the government’s ability to spend in other areas.
The National Budget Agency (CBO) expects the US government’s net interest expense to triple over the next decade, reaching $1.2 trillion annually by 2032. This prompted lawmakers to It is necessary to consider between increasing the budget deficit to maintain spending or a combination of reducing spending and increasing revenue.
If interest rates rise or fall, both will affect bond buyers. This leaves the US government with bond buyers in the event of an increase in interest rates, or if interest rates fall, what policy does the US government have to reduce interest costs without creating a wave of objections from the government. bond buyers.
Reduced ability to invest
With a portion of its revenue to be used to pay interest on debt, the government has little spare money to invest in important areas such as infrastructure, education, and health. Meanwhile, the part of mandatory spending cannot be cut. This can lead to shortfalls in economic development and competition.
Increased financial risk
High levels of public debt can increase financial risks for the country. If the government is unable to repay its debt or incurs high interest rates, the likelihood of a financial crisis and recession increases.
Limit policy choices
Given the high level of public debt, the government has little flexibility in implementing economic policy. Economic remedies or spending policies must be carefully considered to avoid increasing debt and creating additional financial instability.
Burden for future generations
Rising public debt means that future generations will have to pay the debt and suffer the consequences of overconsumption and current borrowing. This can affect the development potential and quality of life of young people in the future.
In short, rising public debt in the United States could have worrisome consequences. This requires careful management and consideration from the government to stabilize the economy and grow in the coming time.
Public debt to the US and to the world
The US public debt ceiling has a wide impact on the US and international economy. Internally, the US public debt ceiling puts pressure on the federal budget, affecting the ability to invest in public investment, education and health care. It can also cause instability in the financial system, affecting interest rates, exchange rates and creating risks to economic stability.
Internationally, the US public debt ceiling could create a global financial crisis. The United States is a major player in the global financial system, and high public debt can spill over into other countries. If the US fails to repay its debt, the credibility of the US dollar could deteriorate and create imbalances in global financial markets.
summary
The US public debt ceiling is an important issue that needs attention and resolution. Causes of this situation include excessive spending and global economic fluctuations. The impact of the US public debt ceiling spread from internally to internationally, significantly affecting the global economy and financial system.
To solve this problem, careful consideration is needed in adjusting government spending and strengthening public debt management. Economic stimulus measures should also be considered to ensure sustainability and minimize the negative impact of the public debt ceiling.
Moreover, international cooperation is also an important factor to stabilize the global financial situation and reduce the risk of the US public debt ceiling.