The USA has an unusual system of having a legal limit on the amount of public debt it is allowed to run up. That limit is currently set at $14.3 Trillion.
It is anticipated that some time in May this ceiling will be reached.
It will take a majority vote of the United States congress to increase the debt ceiling.
Some have argued that increasing this ‘debt ceiling’ is an approval to allow the US government to continue to spend recklessly, and therefore it should not be approved. But what would the consequences be of not increasing this limit?
In practice, if the ceiling is not increased, the US government will not be able to meet its financial obligations including contractual obligations associated with its current debts. So it would actually result in the United States defaulting on its debt – and it would be the first time in history that the US has defaulted on its debt.
What happens when a country defaults on its debt? The people lending money to that country get spooked, and charge more interest for its current and future debt. So the outcome of not raising the debt ceiling would actually result in the fiscal or budget situation in the United States getting worse, not better.
So while those arguing for aggressive cuts to the United States governments spending may have a very good point. Not raising the debt ceiling is the wrong way to pursue this objective.