U.S. Debt set to Reach $20 Trillion During Next Presidency
Despite boasting the largest economy in the world, it seems that we shouldn’t be taking any budgeting tips from America. The country currently finds itself facing a debt crisis that will surely have the next U.S. president sweating, with the nation on course to meet its borrowing limit around mid-March 2017.
This will become a key issue for the newly elected president, and will undoubtedly cause headaches for whoever is elected come November…
Borrowing Limit Set to Be Reinstated
As it currently stands, the federal debt limit has been suspended since late 2015, but this is a scenario that cannot endure forever, and this law is set to be reinstated on March 16th 2017.
The fallout from this will be immediate. Calculations performed by the Bipartisan Policy Centre (BPC) put the country’s estimated debt instantly ahead of the limit, which is set at $20.1 trillion.
According to Shai Akabas, who is the director of fiscal policy at the BPC: “Just two months after the next president and Congress are sworn in, they will be running a government that is up against its legal borrowing limit.”
As a result, it seems likely that the U.S. Treasury will have to seize on its powers to take ‘extraordinary measures’, or else risk the country’s government defaulting on its debts.
In days past, such measures have assumed the form of a rise in the debt limit, yet in order to repeat such a feat, both Congress and the White House would have to agree to doing so. This agreement would have to take place almost immediately, or else it will be rendered ineffective.
Spending cuts are an alternative solution, yet it seems unlikely that these alone would have the power to resolve such a crisis.
A Ticking Time Bomb
An argument to raise the debt limit was first made in 2011, when it caused ructions between Obama and the ruling republicans in Congress. This situation repeated itself in 2013, and put the government no nearer to a resolution.
Market experts recount that, at the time, Wall Street and foreign investors displayed a negative reaction to the uncertainty this catalysed.
Seeing this, the two sides made a renewed effort to reach some kind of accord, which resulted in a suspension of the debt limit until President Obama left office.
Unfortunately, this left the underlying situation unresolved. The national debt, which had grown exponentially following the Great Recession, continued to rise, thanks to slower economic growth and tax revenues, and increased government spending.
The result was that the U.S. government’s outstanding debt rose astronomically, more than doubling between the end of 2007 and August 2016, when it totalled $9 trillion and $19.5 trillion respectively.
As if this statistic were not worrying enough in itself, it means that the total American debt, as of 2012, exceeds the size of the entire U.S. economy for the first time since the close of World War Two.
What Does This Mean?
To put it bluntly, America now presents a poor example of financial management, which could well mark the beginning of a vicious cycle.
Should its debt rise too high, expect to see a reluctance to purchase U.S. government debt in the form of bonds. This has the potential to rock the confidence of existing investors, which could in turn stir up a fear of default, and thus drive down the prices of bonds.
The effects of such an event would be widespread, sending shockwaves across the entirety of the global financial system.
However, it is more likely that in an attempt to avoid such a scenario, the American government will raise its taxes to try and reduce its debt, thus impacting the country’s businesses. This may spur some companies to relocate overseas, perhaps to the tax-friendly shores of the United Kingdom, whose economy would receive a healthy boost.