US Senate Approves Debt Ceiling

America didn’t really resolve its problems when it came to an overtime compromise to avoid the automatic tax increases and spending cuts which were due to come in on 1st January 2013. The deal saw taxes increase for American families earning over the $250000 mark and the ending of some tax breaks for all. Crucially, the deal deferred further discussion on spending cuts for two months and did nothing to address the debt ceiling crisis.

The debt ceiling is a cap on Federal spending which is intended to keep the mammoth US debt in check. The cap is currently set at $16.4 trillion (that’s twelve zeros), but without an increase, the treasury was predicting that the limit would be breached this month or next. Without an agreement to raise the limit, the USA might be forced to default on some of its obligations – a catastrophic situation for confidence in the nation’s fiscal credibility which would force up borrowing costs.

The US Congress has done a good job of patching over the cracks, for the time being. The Senate approved a bill which increases the borrowing limit by $450 billion; keeping the nation in the black until May, probably. The measure needs to be signed into law by the President, but that is a formality.

The real problem is that the Republicans control the House of Representatives and the Democrats hold the presidency and the Senate, so neither party can impose their view on the other. Since the priorities of the two parties are substantially different and their views of what is needed to move the economy forward do not overlap, it is difficult to see where compromise and common ground is to be found. The uncertainty that this political impasse will create is likely to depress the US economy in Q1, if not further into the year.