US debt problem getting worse

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The increase in the US debt ceiling is not the only positive side of the deal reached between the Republicans and Democrats. According to macro-economist Edin Mujagic, the main benefit is that the discussion will be off the table in the coming years. ‘The fear was that the circus would start again the following year.’

It has been agreed that the state’s debt burden may rise above the previously set ceiling of $31.4 trillion until January 1, 2025. The U.S. House of Representatives and Senate have yet to pass judgment on the deal. That is expected to happen during the week.

Mujagic did take into account that both parties would not reach an agreement. ‘In recent decades it has often made little difference.’ But despite major differences, both parties still wanted to work together. “Today, however, there are many Members who have difficulty with that,” says the macro-economist. That’s why it was close this time, he thinks.

Water with the wine

Both parties have had to put some water in the wine for this. American media report, based on sources within the White House, that the US tax agency, the Internal Revenue Service, will have to make a significant loss as a result of the deal: 20 billion of the 80 billion dollars that the institution had previously pledged for more staff and more modern systems will be reversed. Less money is also going to fight poverty, an important theme of President Joe Biden.

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In return, there will be peace in this area for the next two years, Mujagic emphasises. ‘The fear was that you would get this circus again next year. But next year is election year in America and then people would probably have dug in a lot deeper.’

US President Joe Biden speaks to the press at the White House.  It has been agreed that the debt burden may rise above the previously set ceiling of USD 31.4 trillion until January 1, 2025.
US President Joe Biden speaks to the press at the White House. It has been agreed that the debt burden may rise above the previously set ceiling of USD 31.4 trillion until January 1, 2025. (ANP / Zuma Press)

The fact that the debt burden is allowed to rise in the next two years is therefore mainly a win for the Democrats, he thinks. ‘It was mainly Republicans who paid a lot of attention to an extension of up to one year. I have a feeling the Democrats should start celebrating sooner.”

Indebtedness

However, the US federal government must also be careful, because the US debt burden is only increasing. Legally, Joe Biden’s administration has the option of going from $31 trillion in debt to $35 trillion in debt. In the short term that is good news, because it removes a major uncertainty in the financial markets, but the US debt problem is only getting worse. ‘Then you have to have a lot of economic growth, or high inflation, to prevent the debt ratio as a percentage of the economy from rising along with it.’

Mujagic doubts whether Fitch’s assessment of America’s credit value is off the table with the closing of the deal. “They have said that, whether there is a deal or not, they will review America’s creditworthiness. If you have to play this game over and over again, it won’t help your credit rating.’


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