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Debt ceiling showdown: Nation’s financial standing steps back from the brink

A deal was struck at the 11th hour after Democrats and Republicans sparred over the terms of raising the nation’s debt ceiling.

President Joe Biden meets with Senate Majority Leader Schumer, Minority Leader McConnell, House Speaker McCarthy and House Minority Leader Jeffries to discuss the debt ceiling on May 9, 2023 in the Oval Office. Photo courtesy of the White House.

Debate has concluded over the country’s debt ceiling as the nation’s two major parties came to an agreement over  raising the amount of debt that the U.S. can take on – culminating with the president’s approval on June 3. Lawmakers had until June 5  to strike the deal and get it pushed through both houses of Congress.

The debt ceiling controls the amount of debt the U.S. is allowed to take on to pay its bills. Before these talks, it was capped at $31.4 trillion

Legislators had to increase that limit because it was eclipsed in January. Since then the U.S. Treasury Department was “stretching” the nation’s finances by moving money around, but they would not have been able to continue doing so if its coffers had been allowed to run dry.

Bonds – which are given out by the U.S. Treasury – are a form of government debt that provide bondholders with interest over a designated period in exchange for the government being able to use bondholders’ money over the term of the bond. This process of incurring and repaying debt is what allows the Treasury Department to pay the government’s bills when tax revenue is not enough to do so. The amount of bonds put on the market is dependent on the debt ceiling.

U.S. debt is seen as a safe investment because the nation has never defaulted on it and has always made good on repaying debts – both the principal and interest. Many feared that this would change if the U.S. didn’t raise or suspend the debt ceiling.

Fitch is one of the largest credit reporting agencies in the nation. They announced on May 24 that the U.S.’s Triple-A credit rating is at risk of being lowered because of the “political brinkmanship” and “governance challenges” in the United States that led to the passage of the debt ceiling deal with only two days to spare.

In the deal negotiated by party leaders on both sides, Republicans received many concessions from Democrats, including the recouping of unspent Covid-19 funds and permitting reform that will make energy projects such as gas pipelines and EV charging stations easier to build.

To further appease Republicans, lawmakers in the Democratic party agreed to take back $21.8 billion from the $80 billion allotted to the IRS in the Inflation Reduction Act. This money will be alloted to other federal programs. 

Democrats also agreed to implement new work requirements for federal food assistance programs.

In a televised speech on June 2, President Biden explained that the deal protects money going toward healthcare and other services for veterans and the elderly as well as maintaining the infrastructure funding that was secured with the 2021 Bipartisan Infrastructure Law.

The deal’s passage allowed for the U.S. to avoid an economic catastrophe. According to a report from Moody’s – a leading U.S. financial analytics firm – a default could have caused a “deep recession” and the loss of up to 7.8 million American jobs.

Similar debt ceiling negotiations have brought lawmakers down to the wire in the past. In 2011, a last-second deal on the debt ceiling hurt confidence in the nation’s ability to make good on its debts – causing Standard and Poors – another major credit reporting agency – to downgrade the U.S.’s credit rating for the first time in history.

The nation’s credit score eventually rebounded, but it is not set-in-stone, and lawmakers must continue to work together to ensure that the score remains Triple-A.