US Senators approve short-term agreement on debt ceiling to avert economic crisis

The US Senate on Thursday, 7 October, approved a short-term deal to increase the federal government’s debt ceiling, averting a potential financial crisis. According to BBC, the compromise deal between the Democratic leaders and the Republicans extended the debt ceiling until early December, giving legislators more time to work out a potential longer-term agreement. With a 50-48 vote, the US senators agreed to increase the borrowing limit by $480 billion, which is sufficient to prevent the federal government from defaulting by keeping debt payments up until 3 December. 

The latest announcement came amidst fears that the US would default on its national debt, with catastrophic global implications. Top officials had warned that the government would run out of cash and be unable to pay its debts by 18 October unless legislators passed a law raising the borrowing limit that the US Treasury Department can issue. However, Thursday’s announcement would now push the deadline to December. The bill will be sent to the House of Representatives for approval before it can be sent to US President Joe Biden for his signature. 

Before the vote was held, Senate Majority leader Chuck Schumer had said that deal had reached an agreement. His Republican counterpart Mitch McConnell separately had announced that the negotiations were in “good faith”. 

Notably, the agreement comes less than two weeks before 18 October, the day the Treasury Secretary Janet Yellen warned was the deadline to prevent the first-ever default. Now, even though the deadline has been pushed forward, the US lawmakers would still have to address the issue near December in a bid to avert default. According to BBC, if the US defaults on debts, analysts say that it would severely hurt the country’s credit rating, plunge the global financial system into turmoil and possibly even lead to a self-inflicted recession. 

US debt ceiling explained

The federal government spends more money than it collects in taxes, therefore, it borrows money to make up for the shortfall. This borrowing is done via the US Treasury department. Back in 1939, Congress had established an aggregate limit or “ceiling” on how much debt the government can accumulate. 

This limit has been lifted on a number of occasions in a bid to allow the federal government to borrow more. The US Congress often acts on it in a bipartisan manner. However, several Republicans have repeatedly voiced frustration around the new spending proposals that Democrats are trying to push. The Democrats have pointed that the rising debt limit is about paying off existing obligations rather than playing for new ones. They have even informed that President Biden’s policies have only contributed to three per cent of existing debts. 

(Image: AP)