The debt ceiling has long been a topic of heated debate and political posturing in the United States. We first wrote about it here on December 23rd, 2022, and it was entirely predictable that Congress would strike a last-minute debt-ceiling deal before the deadline. This is how debt-ceiling fights typically unfold. Yet every time it happens, analysts forget the past and believe this time is different. The truth is, the debt-ceiling drama of 2023 was not unique, and I doubt future debt-ceiling fights will be either. Let’s examine the deal between the GOP and the Biden administration and explain why we can expect more debt-ceiling battles in the future.
President Biden signing the deal on Friday, June 2nd, ends a saga that has played out throughout the year. It all began in early January when the newly elected Congress struggled to nominate a speaker amidst worries about reaching the $31.381 trillion debt ceiling. Headlines were filled with concern about how a divided government and a fractious House majority could pass a debt-ceiling increase given the immense partisan tensions.
By January 19th, the Treasury confirmed that the government had hit the debt ceiling, and Treasury Secretary Janet Yellen emphasized the need to raise it by June 5th to meet all financial obligations. Over the next few months, numerous columns were written, mistakenly fretting over a potential default and proposing unconventional methods to bypass the ceiling if Congress failed to reach an agreement. Meanwhile, Wall Street saw overall upward momentum in stocks despite the political theater.
Interestingly, this year’s debt-ceiling deal was more bipartisan than any in the last decade. When the House passed the deal, 165 Democratic representatives and 149 Republicans voted in favor. This represents the most evenly supported debt-ceiling lift since 2011, with 37.9% of Democrats and 34.3% of Republicans backing the bill.
The recent deal was a compromise allowing both sides to claim victories while changing little. It suspends the debt ceiling until January 2025, effectively postponing the issue until after the 2024 presidential election, providing ample campaigning material without the threat of default. Additionally, the deal garnered attention for its non-defense budget “cuts,” which are more accurately described as smaller projected spending increases. Non-defense spending will remain flat in 2024 and increase by 1% in 2025, while defense spending will rise by 3% in 2024 and an additional 1% in 2025. This budget deal represents business as usual despite concerns about austerity or deficit reduction.
In summary, the debt-ceiling deal we witnessed is a relatively unremarkable one. It provides a decently long reprieve while making minor adjustments around the edges and mostly maintaining the status quo. It allows both sides to claim victories and grievances simultaneously. Most importantly, it provides ample material for fundraising in the coming year, which is often the real purpose of the debt ceiling.
P.S. It is crucial to differentiate between the debt ceiling and default. Default occurs when a government fails to pay the principal or interest on its debt. On the other hand, the debt ceiling is a self-imposed restriction on the government’s ability to borrow beyond a specific limit. Failure to raise the debt ceiling does not automatically result in default. The US Treasury has various tools to manage cash flow and prioritize debt payments, ensuring default is avoided.
To help demonstrate the point, below is a list of US government shutdowns over the last 50 years due to debt ceilings. These shutdowns did not cause recessions and were not memorable.
1976: In September 1976, the US government experienced a 10-day shutdown.
1977: In March 1977, the US government faced a 12-day shutdown.
1978: In September 1978, the US government experienced a 17-day shutdown.
1981: In November 1981, the US government faced a two-day shutdown.
1984: In October 1984, the US government experienced a three-hour shutdown.
1986: In October 1986, the US government faced a one-day shutdown.
1990: In October 1990, the US government experienced a five-day shutdown.
1995-1996: From December 1995 to January 1996, the US government faced two shutdowns, totaling 26 days.
2013: In October 2013, the US government experienced a 16-day partial shutdown.
2018: In January 2018, the US government experienced a brief three-day shutdown.
2019: In December 2018 and January 2019, the US government experienced a 35-day partial shutdown, the longest in US history.