Debates over raising the debt ceiling deal and the associated nail-biting have become an unfortunate norm in the U.S. The debt ceiling refers to the limit set on the amount of money the U.S. government is authorized to borrow for current existing legal obligations. Congress has the power to raise the debt ceiling if needed. If it is not raised, the U.S. risks defaulting on its obligations – something unprecedented to date.
History of Debt Ceiling Battles
Debt limit challenges have occurred several times over the last decade or so. In 2011, the U.S. avoided default but its long-term debt rating was lowered from AAA to AA+, which resulted in the federal government paying higher interest rates on Treasury bonds, notes, and bills. Two years later, in 2013, Congress agreed to a last-minute short-term extension to avoid a government shutdown. Between 2014 and 2019, debt limit suspensions were enacted by Congress. In 2021, Congress passed a small increase that brought the country to the most recent debt limit showdown.
2023 Debt Ceiling Deal
On June 3, 2023, President Biden signed the Fiscal Responsibility Act of 2023 to end the dispute over the debt ceiling. Congress agreed to extend the debt ceiling through January 1, 2025, in exchange for caps on discretionary spending. Also enacted were some expansions to work requirements for certain recipients of SNAP (Supplemental Nutrition Assistance Program) and TANF (Temporary Aid for Needy Families) payments and an end to student loan forbearance, which means individuals will likely be required to start making loan payments again in October. The law also contained modest reforms of the permitting process to accelerate permitting of some energy projects. No changes were made to Medicaid requirements.
Impact of the Debt Ceiling Deal on Individuals
The debates over the debt ceiling directly impacted financial markets resulting in increased volatility and uncertainty among investors. The extension of the debt limit for two years has resolved that for now. However, history shows that this situation is likely to happen again, especially as Congress continues to become increasingly partisan.
As a result, investors and individuals should take this opportunity to revisit their financial plans. A well-diversified portfolio has always been the recommended approach to reducing risks. Since it is unlikely that every sector or type of investment will have poor results at the same time, the impact of revenue losses in one area can be mitigated by revenue gains in another part of the portfolio.
However, as a result of these regular debt limit battles, it may be necessary to reevaluate assumptions about “safe” investments. Traditionally, US government holdings, including treasury bills have been considered safe investments because the government won’t default. Unfortunately, a default may be possible under the circumstances.
The key takeaway is that this is a good time to connect with investment advisors about your asset allocation strategy. You should also consult with your tax attorney regularly to discuss your tax planning particularly if you have had changes in your financial situation.
If you have questions about the debt limit’s impact on you or your business, contact us for a consultation.