US Debt Ceiling Ensures Greater Prudence

In order to avoid a US payment default, US President Joe Biden and opposition leader Kevin McCarthy agreed to raise the debt ceiling. The Republican-controlled House of Representatives has now approved this, but confirmation from the Democratic-controlled Senate, led by Biden, is still pending. What are the implications of this adjusted US debt limit? Professor Friedrich Heinemann, head of the Research Unit “Corporate Taxation and Public Finance” at ZEW Mannheim, evaluates the deal as follows:

“The US debt ceiling has undeservedly acquired a negative reputation. The seemingly resolved conflict surrounding its increase once again highlights the beneficial nature of such a debt regulation. The conflict has compelled the Biden administration to reduce the excessively strong fiscal impulse resulting from the pandemic. As a result, the unsustainable and rapid growth of US government spending is being curtailed. Moreover, the debt ceiling has forced the polarised factions to reach a consensus in the best interests of the entire nation. This is also a positive development as it signifies that both the government and the opposition have finally taken shared responsibility for fiscal policy. The reduction in expenditure growth also offers much-needed assistance to the US Federal Reserve in its ongoing efforts to curb inflation. Once again, this episode demonstrates the effectiveness of the US debt limit; even though it may temporarily evoke dramatic rhetoric, it ultimately ensures greater prudence in fiscal policy.”