US government hits debt ceiling as Biden and House Republicans face off

The US government has hit the ceiling on its debt, brushing up against its legal limit of $38.381tn and piling pressure on Congress to approve an increase to avoid a debt default in the coming months that would send a shock wave through the global economy.

The countdown toward a possible US government default puts the spotlight on frictions between President Joe Biden and House Republicans, raising alarms about whether the US can sidestep a potential economic crisis.

An artificially imposed cap, the debt ceiling has been increased roughly 80 times since the 1960s. The government can temporarily rely on accounting tweaks to stay open. Any major threats to the economy would be several months away.

But with the House speaker, Kevin McCarthy, presiding over a restive Republican caucus, there are concerns that the government could default on its obligations for political reasons.

McCarthy said Biden needs to recognize the political realities that come with a divided government. The speaker has called for spending cuts of a kind that did not occur under President Donald Trump, a Republican who in 2019 signed a bipartisan suspension of the debt ceiling.

What happens if these measures are exhausted without a debt limit deal is unknown. A prolonged default could be devastating, with crashing markets and panic-driven layoffs if confidence evaporates in a cornerstone of the global economy, the US treasury notes.

The government would have to balance its books on a daily basis if it lacks the ability to issue debt, and it would have to impose cuts equal in size on an annual basis to 5% of the total US economy.

Markets so far remain relatively calm, given that the government can temporarily rely on accounting tweaks to stay open and any threats to the economy would be several months away. Even many worried analysts assume there will be a deal.