The U.S. debt ceiling debate is reaching a critical juncture, as Congress wrestles with the decision to raise the debt limit and avoid defaulting on its debt. Secretary Janet Yellen’s recent warning that the country could run out of cash to pay its bills by June 1 has added urgency to the debate and on Tuesday, President Biden met with Congressional leaders at the White House to discuss the issue.
The House of Representatives, led by Speaker Kevin McCarthy, has passed legislation along Republican party party lines that demands government spending cuts in exchange for their vote. The stakes are high for businesses of all sizes, making it essential to understand the ramifications of this issue. Let’s delve deeper into the implications of the debt ceiling debate and what it means for businesses.
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What is the debt ceiling and why does it matter?
The debt ceiling is a legal limit on the amount of money the federal government can borrow to pay for financial obligations such as Social Security and Medicare benefits, military salaries, tax refunds and more. Raising the debt ceiling does not authorize new spending, however, if we reach the debt ceiling and Congress does not raise it, the government will no longer be able to borrow money to pay for those existing obligations. This could lead to a government shutdown or the first-ever default on the nation’s debt.
What is the standard procedure?
Traditionally, raising the debt ceiling has been a bipartisan obligation, with Congress acting 78 times since 1960 to prevent default. During Donald Trump’s presidency, the debt limit was raised three times, each time receiving support from both Republicans and Democrats. It is essential to note that raising the debt ceiling allows the government to pay existing debts. It does not authorize new spending.
How does business tie into the debate?
Currently, the House majority is proposing to tie the debt ceiling increase to $4.5 trillion in cuts. On the chopping block is everything from programs designed to provide small businesses with access to capital, debt relief for student loans, funding to improve the IRS, and cutting programs aimed at reducing greenhouse gas emissions while making it easier to produce oil and gas.
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Understanding these proposals is essential, as businesses of all sizes rely on a stable economic environment, comprehensive support and services from government agencies like the Small Business Administration, and consistent access to capital. The potential impact of such extensive cuts could disrupt the balance needed for businesses to thrive, ultimately influencing the overall health of the economy.
How would the cuts impact small business?
Proposed cuts to programs like the State Small Business Credit Initiative (SSBCI) could reduce capital for up to 10,000 small businesses which would support as many as 100,000 jobs. Additionally, cuts to the Department of Commerce’s Capital Readiness Program, which supports minority and other underserved entrepreneurs, would further strain small business growth. Spending cuts could lead to deteriorating infrastructure, a less educated workforce, and higher healthcare costs.
If the proposed cuts lead to an impasse, the failure to raise the debt ceiling could result in increased borrowing costs for both the government and businesses, making it more costly for businesses to borrow money to invest in their operations. This added financial burden could further strain businesses already struggling to recover from the pandemic’s economic impact.
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The potential consequences of this debate have led over 100 small business owners and leaders from across the nation to sign a letter, coordinated by Small Business for America’s Future. The letter urges legislators to pass a clean debt ceiling bill, avoiding the use of it as leverage to demand spending cuts, and preventing the unprecedented risk of a government default.
What economists are saying
Seeing the same risks, more than 200 economists, representing a wide range of economic policy views submitted a letter urging lawmakers to raise the debt ceiling without delay and avoid the unprecedented act of defaulting on the debt. They emphasize that the consequences of such a default are unpredictable and potentially catastrophic. These economists warn that a federal default could lead to a swift and severe economic downturn, resulting in unnecessary layoffs across various sectors of the economy.
In addition, Moody’s Analytics Chief Economist Mark Zandi has estimated that the House’s proposed spending cuts tied to raising the debt ceiling could result in a reduction of about 800,000 jobs by the end of 2024 and push the jobless rate closer to 5% from the current 3.5%. Zandi also projects that economic growth would slow to 1.61% by 2024 under the spending cut proposal, compared to current forecasts of 2.23%, significantly increasing the likelihood of a recession.
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How can businesses prepare?
Businesses should engage in financial planning and contingency planning. Financial planning involves analyzing the potential impacts of a default or prolonged debt ceiling debate on your business’s operations and finances. Contingency planning involves developing a plan of action in the event that a default or prolonged debt ceiling debate occurs.
Businesses can also take steps to protect themselves from the potential impacts of a default. For example, businesses can reduce their reliance on imports and diversify their supply chains to reduce their exposure to a decrease in the value of the dollar. They can also take steps to reduce their borrowing costs, such as refinancing existing debt and negotiating lower interest rates on new debt.
Business leaders can speak out. Just today, heads of business organizations sent a letter to congressional leadership urging Congress to take immediate action to prevent the United States government from defaulting.
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The bottom line
The U.S. debt ceiling debate is a critical issue for all business owners to monitor and understand. A failure to raise the debt ceiling could lead to economic instability and severe consequences for businesses, their employees, and the broader economy. To protect their interests, business owners should advocate for the federal government meeting its current obligations by raising the debt ceiling, actively engage in financial and contingency planning, and emphasize the importance of supporting the programs that help them grow and succeed. Together, we can ensure a stable and prosperous future.
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