US Debt Ceiling: Government suspends debt ceiling, averts historic default. What it means and how will it affect you?

The US Congress on June 1 passed a legislation to suspend the debt ceiling to ensure the US Government does not default of its debt obligations. 

The US had a debt ceiling at $31.4 trillion, that meant the US Government could not borrow anything more than the said amount to furnish its debt obligations. 

The US government issues treasury notes of different tenures and has to pay interest on them. In case the debt ceiling was not suspended, the US Government was at a risk of defaulting on its debt on June 5 - when it had to pay the interest on its debt. 

US debt ceiling suspended: What it means? Will it push US stocks higher?

The US Treasury Department had warned it would be unable to pay all its bills on June 5 if Congress failed to suspend or raise the US debt ceiling. 

In case the US Government defaults on its debt - it could send a cascading effect throughout emerging economies and developed economies of the world. The major reason for this is because the US treasury is considered to be the safest financial investment in the world and a case of default would lead investors to pull out a lot of their investments from riskier markets like equities. 

As the debt ceiling has been lifted, that means the US government will be able to borrow to repay its past debt obligations. The US like most countries is a debt oriented or a deficit economy, which means it spends more than it earns. 

The US Senate has suspended the debt ceiling until 2025 - which is when the next Presidential elections will take place in the US. 

US lifts debt ceiling: What deal President Joe Biden made with House Speaker Kevin Mcharty?

According to the deal, President Biden will have to keep discretionary spending undertaken by the US Government at a minimum and not increase expenses. Non-Defense expenses which have aspects like veteran benefits, health, education and law enforcement will be expected to be flat, that means no added expense on these sectors, at least this year. 

However, the deal would boost total defense spending to $886 billion, in line with Biden's 2024 budget spending proposal.That is about a 3% increase from the $858 billion allocated in the current budget for the Pentagon and other defense-related programs in other agencies.

What is debt ceiling?

The concept of the debt limit, or ceiling sets the maximum amount of outstanding federal debt the U.S. government can incur. In easier terms, it is the maximum amount of debt the US Government can take on. 

In January 2023, the total national debt and the debt ceiling both stood at $31.4 trillion. According to think tank, Council for Foreign Relations, The U.S. Government has run a deficit averaging $1trillion every year since 2001. 

A point to note is - The Congressional action to elevate the debt ceiling does not result in an expansion of the country's financial obligations, as the decisions regarding expenditure are determined through separate legislative processes. Any alteration to the debt ceiling necessitates the approval of a majority in both houses of Congress.

Historically, the US has raised and narrowed the debt ceiling to suit its borrowing needs multiple times.

This is not investment advice. Investments in the securities market are subject to market risk, read all the related documents carefully before investing. Past performance is not indicative of future returns.