America’s whopping $14.29 trillion dollars debt ceiling is, for the tenth time in the past decade, going to fall short if nothing is changed by August 2nd. With a deficit of $1 trillion expected this fiscal year, it is hard to imagine exactly how that much money will translate into spending cuts or tax increases. The United States’ debt has been rising for decades now, and as they rebuild their economy after the recession, they are in no position to begin reducing it anytime soon. To reach President Obama’s proposed budget for 2012, the ceiling would have to be lifted by $2.2 trillion. For the Republican budget, it would have to be raised by $1.9 trillion. If the ceiling is not lifted, federal spending would have to plummet dramatically or taxes would have to rise significantly, or they will be forced into a default.
With the Republicans pushing for spending cuts and the Democrats pushing for tax increases, it seems obvious that the Republicans are using the debt ceiling in their favour. Historically, the debt ceiling has been used for exactly that: a negotiation tool to change or protest existing policies. In this particular case, there seems to be more than enough reason for the Republicans to be outraged over the proposed budget as it does not provide a credible path to balanced budgets. Medicare and unemployment benefits could be the first to take a hit. It seems that Obama’s push to the left with maintaining current services will not be possible unless funding comes from taxpayers’ pockets. Tax increases have been aggressively opposed by the Republican Party in budget negotiations, forcing President Obama to make difficult decisions, especially with his approval ratings standing so low.
The effects of such an influential country defaulting could be disastrous not only to the US, but also to countries who invest, trade or collaborate with them. Unlike the last case of a default, which was Peru in the year 2000, the US economy directly affects the world economy and is in no position to start paying off debt any time soon. Obama has said that if a default were to occur, it could trigger another recession and would have serious outcomes for the economy. Both parties agree that a default would have consequences.
A default is very unlikely as congress has never failed to raise the debt ceiling, but the possibility is definitely lingering. A default in the US could happen before Greece hits rock bottom, which is a startling comparison made by many to put the urgency of the situation in perspective. Obama’s proposal of a $4 trillion deficit reduction within the next ten years has been denied by Republicans. An agreement of $2 trillion seems more realistic at this point, although the Republicans seem reluctant to do so. If the treasury does not issue new debt, payments to creditors and other payments, including military salaries, social security, Medicare payments and unemployment benefits, could be limited or delayed.