Now the Debt-Ceiling Crisis Has Passed, What Happens Next?
Key takeaways
- After weeks of wrangling, U.S. politicians voted to pass the debt-ceiling deal and suspend the limit until 2025
- The U.S. Treasury now faces an uphill task of replenishing its exhausted accounts by selling bonds and bills
- No word on the test case for a President to exercise the 14th amendment and bypass Congress to avoid another hair-raising negotiation period
It’s been a few short weeks since the debt-ceiling saga drew to a close, with Congress passing the deal and the headlines quickly moved on. While the worst of the U.S. debt-ceiling drama may be behind us, the U.S. Treasury now faces the issue of raising funds quickly without toppling the already-strained banking industry. Let’s get into the details.
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What happened with the debt ceiling drama?
Every so often, the government must authorize more borrowing to pay its bills so it can pay federal employees, social security, Medicare and the military, among others. In recent years the debate has become politicized to the point of approaching a US debt default — which would be an unprecedented situation and spark a global financial crisis.
Thankfully, though it was close, we didn’t quite reach that point this time. Eventually, Speaker McCarthy and President Biden managed to get enough votes for the deal, which both sides criticized but ultimately voted to pass.
Defense spending increased by 3% this year to $886 billion, while welfare programmes like SNAP and TANF gained stricter work requirements to qualify for the aid. Medicaid remained untouched.
The IRS also lost $20 billion in proposed funding and new energy projects will be able to get off the ground quicker. There weren’t any tax hikes for the wealthy, which upset some Democrats, and Republicans were left irritated when Biden’s historic student debt forgiveness scheme survived.
What happens next?
The good news is that the U.S. government won’t have to worry about another debt-ceiling crisis until 2025, meaning the 2024 presidential election won’t be affected by the politics around borrowing, budgets and spending.
The not-so-good news is that the Treasury has a pretty big task on its hands to replenish the coffers. As the debt-ceiling saga intensified, the Treasury had just $23 billion in the bank at the start of June — a trifling figure compared to the usual $500 billion it likes to have in reserve. It now needs to focus on selling bonds and short-term bills in a bid to raise cash — and quickly, so the borrowing spree could put more strain on the U.S. banking system.
There was also talk of President Biden taking a test case to the federal courts about exercising the 14th amendment, which would give a president overruling authority to avert a debt-ceiling crisis without Congressional approval, but it’s fallen quiet since the deal was passed.
The bottom line
The U.S. narrowly averted what could have been the biggest financial crisis the world’s largest economy has ever seen. That’s why it was so important for the deal to pass — but even though the worst is over, the Treasury now faces an uphill battle to borrow money without pressuring the banking sector.
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