What happened?
On 1 June, the US Senate approved Fiscal Responsibility Act by a 314/117 margin, allowing the US treasury department to issue T-bills, bonds and notes. There was no new limit set, rather the debt ceiling has been suspended till 2025. President Biden said: “The agreement represents a compromise, which means not everyone gets what they want. That’s the responsibility of governing.” House of representative speaker McCarthy said: “It has historic reductions in spending, consequential reforms will lift people out of poverty into the workforce, rein in government overreach – there are no new taxes, no new government programs.”
An assessment by Congressional Budget Office projected that the budget deficit would be reduced by roughly USD 1.5 trillion from 2023-2033, and reductions in discretionary outlays would amount to USD 1.3 trillion from 2024-2033.

What is the background?
First, the debt ceiling has become increasingly political. The current political standoff was over reinvigorating American greatness but with divided visions. The Republicans wanted to induce severe budget cuts, easier licensing provisions for energy projects, stricter work conditions for food stamps and decreased domestic spending while Democrats wanted to increase taxes which they could not. The priorities are not long term and each side has planked their re-election agendas for seeking electoral support. With the information revolution at its peak, the agenda is more tainted with publicly stated political positions.

Second, the inflation reduction act. The IRA Act passed last year introduced policies to contain inflationary trends through localising supply chains and providing subsidies for setting up manufacturing industries in the US. This entailed commitment from the federal government to give subsidies in implementing such policies which would create additional fiscal burden. The largest impact has been felt in the semiconductor industry, even chip manufacturers from Europe are attracted to the subsidy regime introduced by the USA. 

Third, raising the debt ceiling is not new for the US. According to TIME magazine, the US has added up to USD 25 trillion in debt in the last two decades and every time the expenses have outmatched the revenues. The debt ceiling has been raised 78 times since 1917 and stood at USD 31.4 trillion which was breached in January 2023. Currently, the debt-to-GDP ratio of the US stands at approximately 120 per cent of the GDP.

What does it mean?
The US treasury securities are held in maximum number by Japan, followed by China and UK. Total treasury securities stands bought by other countries stands at USD 7.655 trillion and there is likely to be less buying from now onwards as the US looks within to funds to excessive debt. Reduced economic engagement in buying T-bills by developing countries will stagnate their progressive welfare policies. 

The debt regime will transition from lenient to stricter conditions across the world as the US shies away from its role due to internal and external political conditions. At the writing of this note, the NY Taxpayer and International Debt Crises Protection Act is making its way to the assembly in New York. The bill would constrain the New York State to invest in foreign entities and would entail corporate wisdom on restructuring loans and sharing losses. Inward-looking US federal government will likely dilute its financial clout in the global economy as China should emerge as another balancer. This might as well be the reason why the US will shy away from defaulting on its debt this once.