Why can't the US balance its books?

Political divisions are dogging attempts to reach consensus, even on vital issues such as a multi-trillion-dollar debt limit

Traders work on the floor of the New York Stock Exchange on Thursday as investors continue to worry about the debt-ceiling debate in Washington. Getty
Powered by automated translation

Most of us try to manage our household finances in a way that leads to stability, predictability and peace of mind. Income and expenditure are balanced on a monthly or yearly basis, and debt – whether for a car, a child’s education, a wedding or in the form of a mortgage – is carefully scrutinised. This is done in the knowledge that getting it wrong or failing to look ahead could have serious financial consequences for us and our loved ones.

A country’s finances may be infinitely more complex but the basic principles still apply: juggling income and outgoings plus carefully managing borrowing. Governments also have the advantage of significant institutional knowledge and being able to call on some of the best economic minds available for guidance and advice. This makes the belated arrival of a deal – albeit tentative – on the US debt ceiling at the weekend all the more perplexing to outsiders. How can a leading nation such as America come so close to defaulting on what it owes?

Political wrangling and division are at the heart of the matter. Talks on the issue between US President Joe Biden’s Democrats and Congressional Republicans have dragged on for months. Republicans wanted spending cuts to slow the growth of the country’s debt. Mr Biden and the Democrats wanted to reduce the debt by increasing taxes on high-earners and businesses while stepping up spending on social programmes such as free community college.

US President Joe Biden meets US House Speaker Kevin McCarthy about the debt ceiling in the Oval Office of the White House last Monday. Despite the smiles, political tensions between the Democrats and Republicans have been running high. AFP

The apparent deal to raise the country’s $31.4 trillion debt ceiling – the total amount of debt the US Treasury Department can borrow to meet its financial obligations – seems to have been struck with little enthusiasm. In a tweet on Saturday, Speaker of the House of Representatives Kevin McCarthy said the agreement had been reached after Mr Biden “wasted time and refused to negotiate for months”. Mr McCarthy, a senior Congressional Republican, also described the compromise as “an agreement in principle” – an important qualification that shows this may not be the final twist in this tale.

The debt issue is important not just for Americans but the world. Although a default would have hurt US citizens’ savings, hit federal salaries and had an impact on spending plans for important priorities such as education and health care, it would also reverberate through international markets. The fate of many national economies are tied to that of the US – a debt default by a superpower that is home to a global reserve currency would have untold consequences.

The political divisions apparent in Washington over such a crucial issue could be a taste of what is to come as the country gets ready for its next presidential election, in 2024. It dogged Mr Biden during his trip to Japan for the most recent G7 summit, distracting focus from what was meant to be a meeting of geopolitical importance. For many US politicians, finding common ground appears to be a harder task with each passing year. Crises of governance in the US have historical precedent: since 1976, beginning with the Ford administration, the federal government has shut down 21 times amid legislative conflict.

The lack of co-operation that has bedevilled high-stakes US politics for the past number of years shows little sign of abating. If agreement on a critical issue such as a multi-trillion-dollar debt is arrived at only after painstaking, 11th-hour talks, then the US public and the rest of the world will be right to wonder how American politicians – like the rest of us – are trying to balancing the books.

Published: May 29, 2023, 3:00 AM