Congress is at war over the US national debt limit: what it is and how it affects our life - ForumDaily
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Congress is at war over the US national debt limit: what it is and how it affects our lives

The debate on the US national debt limit between Republicans and Democrats continues. Meanwhile, the US is approaching default. We decided to figure out what this limit is and why the left and the right are arguing among themselves.

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The limit was suspended in 2019 and automatically reinstated in early August 2021. Senior Republicans in the Senate, who do not approve of US President Joe Biden's spending program, said the GOP could oppose any attempts to raise the limit this year.

What is this limit and what will happen if it is not increased

Congress limits the amount of money the government can borrow, and once the limit is reached, legislators must raise or suspend it before the Treasury Department can issue additional bonds.

That is, the national debt is the amount that the government borrows to pay all the necessary expenses or to replenish the budget deficit. In other words, this is the difference between how much the government spent and how much money it actually has. Present Tense.

Before World War I, Congress approved borrowing for specific purposes, but over the next two decades it gave the Treasury more flexibility to issue bonds without separate, clear legislation. By 1939, Congress had effectively set an aggregate limit that delegated the Treasury the ability to borrow up to a certain amount. According to the Congressional Research Service, the limit has been raised or changed 98 times.

In July 2019, Congress voted to suspend the debt limit until July 31, 2021, after which the previous $ 22 trillion limit will be changed to include any new borrowing in interim years. The limit was restored on August 1 at about $ 28,5 trillion, and this figure includes debt owned by the public and government debt. Thereafter, the Treasury will no longer be able to use bond markets to raise new funds.

On the subject: Hundreds of thousands from each taxpayer: the real US national debt is catastrophically higher than the official one

In recent years, this once routine act of increasing the limit has become a political balancing act that has led the United States to default several times. Roger Ferguson Jr. and other experts argue that the debt ceiling should be eliminated entirely. The only other advanced economy to have such an economy is Denmark, and it has never come close to reaching its ceiling, writes CFR.

Treasury chief Janet Yellen said the department will begin using emergency measures to save money so the government can continue to pay its obligations to bondholders, social security recipients, veterans and others. Once these measures are over, the Treasury will begin to pass payments on its obligations, which could provoke a default on the US debt.

Who should the state

Usually you, your own citizens. For example, the Pension Fund (or funds) accumulates payers' money. Since the Pension Fund does not give away all this money at once, it accumulates more than it needs. With the surplus, the fund buys bonds from the government. In response, the government pays only interest on bonds, and can use the money itself at its discretion.

In addition to its citizens, the government can borrow money from other states or world organizations. For example, the World Monetary Fund.

Why waste money that isn't there

They allow the government, without waiting for its own money, to cover the cost of public services, for example, provide free medical care, care for parks, and repair roads.

But there is a catch: if organizations or countries that lend money to the government begin to doubt that it can continue to pay them interest, problems begin. To appease creditors, the government raises interest rates, for which it must borrow more money.

The World Bank believes that a country's national debt becomes problematic when it reaches 77% of the country's annual GDP. It is the ratio of public debt to GDP that is considered the true indicator of how bad (or good) the government's situation is.

How COVID-19 Pandemic Affects Debt

In response to the pandemic, the federal government has spent trillions of dollars on economic stimulus, including incentive payments to citizens and aid to businesses, state and local governments. According to the Congressional Budget Office (CBO), these measures increased the federal budget deficit to $ 3,1 trillion in 2020, about 15% of GDP and the highest level since World War II. Even before the pandemic, the CBO predicted that the annual deficit would surpass the $ 1 trillion mark in 2020 and remain above that level indefinitely.

How Debt Reached Today's Level

The United States has run annual deficits—spending more than the Treasury collects—almost every year since the country's founding. The post-World War II period, during which the United States emerged as a global superpower, is a good starting point for examining modern debt levels. Wartime defense spending led to unprecedented borrowing: in 1946, the debt skyrocketed to more than 100% of gross domestic product (GDP).

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Over the next thirty years, sustained economic growth gradually reduced debt as a percentage of the economy, despite the Korean and Vietnamese wars and the establishment of Medicare and Medicaid programs. Overall, debt as a percentage of GDP bottomed out in 1974 at 24%.

Beginning in the 1980s, sharp increases in defense spending and sharp tax cuts ushered in a new period of rising debt. During the 1990s, a combination of tax increases, defense spending cuts, and an economic boom reduced debt as a percentage of GDP and, beginning in 1998, produced four consecutive years of budget surpluses—the first such streak in forty years.

Deficits returned under President George W. Bush, who oversaw a period of tax cuts, military spending in Afghanistan and Iraq and major new benefits such as Medicare Part D. Annual deficits reached record levels—more than $1 trillion—under President Barack Obama, who responded to The Great Recession continued with bank bailouts and hundreds of billions of dollars in fiscal stimulus.

Public debt (a measure of how much the government owes foreign investors) was $ 16,9 trillion in 2019. This is more than double the 2007 amount, increasing to nearly 80% of GDP from 35%. Taking into account the domestic debt or debts of one US government agency to another, the total in 2019 was more than $ 22,9 trillion, which is more than 120% of GDP. Before accounting for the cost of combating COVID-19, the US national debt was projected to exceed $ 29 trillion over the next decade. It now stands at about $ 22 trillion and is projected to double by 2051.

What the rest of the budget looks like

In addition to emergency spending, most of the federal budget goes to social programs such as Social Security, Medicare, and Medicaid. Unlike discretionary spending, which Congress must authorize each year in the appropriation process, subsidies are mandatory spending that occurs automatically unless Congress changes the underlying legislation.

What are the main drivers of debt

The main drivers are still compulsory spending programs, namely Social Security - the largest US government program - Medicare and Medicaid. Their spending, which currently accounts for nearly half of all federal spending, is expected to rise as a percentage of GDP due to an aging US population and, as a consequence, rising health care costs. However, related tax revenue is projected to remain flat.

President Trump has signed several debt legislation. The most important of these is the Tax Cuts and Employment Act. The Tax Reform Act, passed in December 2017, is the most comprehensive in three decades. Trump and some Republicans said the law's tax cuts should stimulate economic growth enough to boost government revenues and balance the budget, but many economists were skeptical about the claim.

The CBO said the law will increase annual GDP by nearly 1 percent over the next ten years, as well as increase the annual budget deficit and add approximately $ 1,8 trillion to debt over the same period. In addition, many provisions will expire by 2025, but if they are extended, the debt will increase even more.

Spending deals made in 2018 and 2019 are forecast to widen the deficit as well. In July 2019, congressional leaders agreed on a two-year budget agreement, under which spending increased by $ 320 billion, which led to an increase in the deficit faster than it would have been under the current status quo.

How does US debt compare to other countries' debt

The US debt to GDP ratio is one of the highest in the developed world. Among other large industrialized countries, the United States is second only to Japan.

According to the International Monetary Fund, the pandemic has sharply increased the volume of borrowing around the world. Among advanced economies, debt as a percentage of GDP increased from about 75% to nearly 95%, driven by double-digit increases in debt in the United States, Canada, France, Italy, Japan, Spain and the United Kingdom.

The United States has long been the largest economy in the world and had no record of default on its debts. Moreover, it has been a world reserve currency country since the 1940s. As a result, the US dollar is considered the most coveted currency in the world.

Strong dollar demand has helped the United States fund its debt as many investors choose to own low-risk dollar-denominated assets such as Treasury bills and US bonds. Strong demand from foreign lenders (mainly central banks increasing their dollar reserves, not market investors) is one of the factors that helped the United States borrow at relatively low interest rates. This puts the United States in a safer position to financially fight COVID-19 compared to other countries.

How important is the growth of US debt

Massive borrowing from the pandemic, along with massive spending plans, has rekindled the debate over the danger posed by public debt. Some economists fear that the United States will be stuck in a "debt trap" where high levels of debt will curb growth, which in itself leads to an increase in debt. Others, including those who adhere to the so-called modern monetary theory, say the country can afford to print more money.

Some say debt service can divert investment from vital areas such as infrastructure, education, and climate change. There are also fears that this could undermine US global leadership by leaving less US dollars for military, diplomatic and humanitarian operations around the world.

On the subject: How the dollar has withstood the gigantic public debt and US budget deficit for decades

Other experts are worried that large debts could hinder the economy or provoke a financial crisis. They argue that there is a tipping point after which large accumulations of public debt begin to slow growth. In such a scenario, investors could lose confidence in Washington's ability to fix its fiscal system and be reluctant to fund US borrowing without much higher interest rates. This can lead to even greater deficits and more borrowing, or what is sometimes called a debt spiral. A financial crisis of this kind may require sudden and economically painful spending cuts or tax hikes.

However, some economists argue that these fears are exaggerated and suggest that Washington still has decades to tackle the problem. They indicate that the cost of financing debt (in terms of interest payments as a percentage of GDP) has been relatively low over the past two decades, although it will increase over time. Moreover, they argued that the United States should take advantage of current low interest rates to invest in infrastructure, climate change, and social safety nets.

How problems can be prevented

The government sets a debt ceiling for itself. When the amount of debt reaches this value, the government can no longer issue bonds and is obliged to pay only with the money that it has available. The government can raise the debt ceiling when it sees fit.

Politicians and political experts have pushed countless plans over the years to balance the federal budget and reduce debt. Most involve a combination of significant spending cuts and tax hikes to change the debt curve.

Reduced costs. The most comprehensive proposals to curb debt include significant cost cuts, especially for burgeoning welfare programs, which are the main drivers of future spending increases. For example, the 2010 Simpson-Bowles plan, a major bipartisan deficit reduction plan that did not receive congressional support, would channel debt into recession and cut overall spending, including the military. This would, among other things, reduce Medicare and Medicaid benefits and put Social Security on a sustainable footing by cutting some benefits and raising the retirement age.

Increased income. Most fiscal reform plans also aim to boost tax revenue, whether by eliminating deductions and other tax subsidies, raising rates for higher-income earners, or introducing new taxes such as a carbon tax. Thus, the United States would have received more than $ 1 trillion in new tax revenue. By contrast, analysts estimate that the 2017 tax reform will cut federal revenues by about $ 1,5 trillion over ten years. Many economists and politicians, including Biden, are instead calling for higher taxes for high-paid individuals and corporations. Some suggest taxing wealth or total assets in addition to income.

Some optimists believe that the federal government could continue to increase debt for many years into the future with little repercussions, thanks to the deep reservoirs of confidence the US economy has accumulated in the eyes of investors. But many economists think this is too risky. "Debt doesn't matter as long as it's not particularly tangible," said Maya McGinias, president of the bipartisan committee on responsible federal budget. "Taking advantage of our privileged position in the global economy, we may well lose it."

Read also on ForumDaily:

How American States' Debt Affects the Lives of Their Populations: An Overview

How the US dollar became the world's reserve currency: history and interesting facts

How the dollar has withstood the gigantic public debt and US budget deficit for decades

Hundreds of thousands from each taxpayer: the real US national debt is catastrophically higher than the official one

Miscellanea In the U.S. U.S. national debt limit
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