United States Debt Ceiling Crisis
The United States debt ceiling crisis refers to a debate on the maximum amount of money that the government of the United States should borrow. The United States debt ceiling was established in 1917 during the First World War. It is a mechanism that limits the amount of money that the government of the United States is allowed to borrow at any given time.
Debt ceiling holds the president financially responsible for the nation’s borrowing. Hitting this debt ceiling means that the country has defaulted on the interest paid to creditors. However, the government has been raising debt ceiling every time its borrowing nears it.
Consequences of hitting the debt ceiling would include late, missed or partial payments of the federal pensioners, Medicare and Social Security recipients, government contractors, government employees and increased interest rates which would increase borrowing by the United States further. The United States debt ceiling crisis refers to a heated debate on how the U.S should avoid such problems.
In 2011, there was a United States debt ceiling crisis. The crisis was resolved by passing the Budget Control Act, 2011 by the Congress. The Congress also decided to raise the United States debt ceiling immediately by $400 billion. Initially, debt ceiling was at $14.3 trillion. This Act increased it to $14.7 trillion. It also created an option for increasing this amount in the future.
This agreement included spending cuts of $900 billion over a period of 10 years as well as the establishment of a committee that would identify other spending cuts. Although the debt ceiling was not defaulted, the crisis downgraded the credit rating of the United States.
In 2013, there was another United States debt ceiling crisis. This crisis was part of the continuing political debate in the Congress about the spending of the federal government, debt ceiling and the national debt. The 2013 debt ceiling crisis started on January 2013 and it ended on 17th October 2013 after the Continuing Appropriations Act of 2014 was passed.
On 31st December 2012, the United States debt ceiling had been reached technically and the treasury started its extraordinary measures to finance the government. Fitch Ratings gave a warning on 15th January 2013 that if the debt ceiling was not raised on time, the situation would necessitate a formal review of the U.S rating. This would result in downgrading of the U.S from AAA. Fitch warned that such a downgrade would be caused by lack of a plan for bringing down the U.S deficit by adopting medium term strategies.
Fitch opinion was that debt ceiling was a potentially dangerous and an ineffective mechanism to use in enforcing financial discipline. Nevertheless, the president urged Congress to raise the U.S debt ceiling. After a period of debate and involvement of financial experts as well as debt ceiling suspension, the United States debt ceiling was reinstated to $16.7 trillion in order to reflect the government’s borrowing.
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