A very serious recession could be the final result of the United States Government’s current ‘debt ceiling crisis’ if the parties don’t compromise, says a senior international economist at Charles Sturt University (CSU).Professor John Hicks, with CSU’s Faculty of Business, provides an easy guide to the current crisis.
- Governments worldwide spend money on goods and services which represent a large proportion of their total expenditure.
- Like individuals, if governments are going to spend, they need to have a source of funds from which payments can be made. Tax revenues provide the greater part of the funds government has to spend.
- However, taxes are often insufficient to cover the government’s desired expenditure. When this happens, governments must borrow to finance the difference between what their tax receipts can buy and what they wish to buy. These borrowings must be repaid with interest in the future.
- Governments then need to increase taxes to pay for higher government expenditure and the loan repayment plus interest, or substantially reduce government expenditure, or a combination of both. Any combination of the two could have serious consequences on the country’s level of economic activity and give rise to high, and rising, levels of unemployment.
- The national US Congress sets limits on the level of federal government debt, largely to avoid the problems experienced by Greece in recent years and to restrain growth in government expenditure.
- Every two years, growth in government expenditure pushes up against this limit – the ‘US debt ceiling’ – and if government expenditure is to be maintained or allowed to grow the limit must be raised, which it usually is. For example, in 2011 Congress agreed to increase the ceiling at the last minute, which is also likely this time.
Professor Hicks believes, however, that commentators are now less confident this occasion that the ceiling will be raised without serious concessions being made on expenditure and taxation because of changes in the political make-up of the US Congress that has taken place between the 2011 and 2013 crises.
“A group within the Republican Party, the so-called ‘Tea Party’, has more representatives in the US Congress since the 2012 election. Members of the Tea Party are ideologically wedded to small government and low taxation and seem willing to use this occasion to make their point. Will they push their cause all the way and try and prevent the debt ceiling being raised?” he asked.
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