US debt-ceiling brinkmanship is costly

The political feud over the United States debt ceiling is now the most significant dark cloud hovering over the global economy and markets. This is a regular event that invariably gets resolved eventually, but the delay and the uncertainties involved are potential sources of turmoil.

Having crossed US$31.4 trillion (S$41.7 trillion), the total US debt has breached the debt ceiling set by the US Congress because expenditures have exceeded revenues. This means that the US Congress has to raise the debt ceiling to enable the US government to meet its payment obligations. Usually, this happens without drama. But in recent years, the Republican Party has made raising the ceiling conditional on the government making spending cuts in line with the party’s political priorities. This happened during the first Obama administration, when the threat of the US government being unable to meet its payment obligations led to its credit rating being downgraded in 2011. This year, the Republicans have demanded spending cuts in areas that include tax incentives to fight climate change, funding for the Internal Revenue Service and student debt relief as a condition for their consent to raise the debt ceiling.