What is the debt ceiling?
The focus in the stock market over the past few weeks has been on the June 1st deadline when Congress will no longer have the funding needed to continue operations. The debt ceiling, also known as the debt limit, is the limit imposed by the government on the amount of money it can borrow to finance its activities.
In the past, when the U.S. has come close to reaching its debt limit, Congress has agreed to increase this amount to meet its financial obligations. The debt limit is set to promote fiscal responsibility and keep the government in check on its spending.
How did we get here?
The U.S. government spends roughly $4 for every $3 it receives in revenue. This is often a point of contention between Democratic and Republican members of Congress. This shortfall was exacerbated by the lack of revenue generated from taxes. It is estimated that tax revenue came in roughly $250 billion less than anticipated, causing the cash on hand to run out on June 1st instead of August 1st.
One major issue that the IRS faced was the lack of capital gains tax generated in 2022. With the prices of stocks and bonds dropping drastically, investors refrained from realizing capital gains, and those who did sell were able to write off losses against their income.
Another issue was that the IRS delayed the tax pre-payment deadline for almost all residents of California due to weather disasters, extending it all the way back to mid-October and causing a delay of roughly $42 billion in taxes.
The debate within Congress
The debt ceiling is a politically contentious issue, and debates often arise when the government approaches or reaches the limit. In the past, Congress has raised the debt ceiling to avoid default and allow the government to continue borrowing.
However, failure to raise the debt ceiling in a timely manner can have serious consequences for the economy, financial markets, and the government’s ability to meet its obligations.
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