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By Bryan Keogh, The Conversation and Matt Williams, The Conversation 

President Joe Biden and House Speaker Kevin McCarthy on May 27, 2023, agreed in principle to a tentative deal that would raise the debt ceiling while capping some federal spending at current levels.

The accord, if approved by both houses of Congress, would avert an unprecedented default that threatens to derail the economy and put hundreds of thousands of Americans out of work. Negotiators agreed to lift the ceiling for two years – past the 2024 presidential election – while putting a temporary cap on most nondefense spending at 2023 levels. It would also reduce planned funding for the IRS, impose new work requirements on some people who receive benefits from the federal program known as SNAP and claw back billions of unspent funds from pandemic relief programs.

The Conversation has been covering the debt ceiling drama since January, when Republicans took over the House, raising fears that brinkmanship would lead to an economic catastrophe. Here are five articles from our archive to help you make sense of a couple key aspects of the tentative deal and provide context on the debt ceiling fight.

1. What is the debt ceiling

First some basics. The debt ceiling was established by the U.S. Congress in 1917. It limits the total national debt by setting out a maximum amount that the government can borrow.

Steven Pressman, an economist at The New School, explained the original aim was “to let then-President Woodrow Wilson spend the money he deemed necessary to fight World War I without waiting for often-absent lawmakers to act. Congress, however, did not want to write the president a blank check, so it limited borrowing to US$11.5 billion and required legislation for any increase.”

Since then, the debt ceiling has been increased dozens of times. It currently stands at $31.4 trillion – a figure reached in January. The Treasury has taken “extraordinary measures” to enable the government to keep borrowing without breaching the ceiling. Such measures, however, can only be temporary – meaning at one point Congress will have to act to lift the ceiling or default on its debt obligations, which is expected to happen by June 5, according to Treasury Secretary Janet Yellen, if the deal isn’t approved in time.

2. The trouble with work requirements

One of the biggest sticking points toward the end of negotiations was work requirements for recipients of government aid. The tentative deal would raise the age for existing work requirements from 49 to 54 years on able-bodied adults who have no children. This is less than what Republicans had earlier sought. There are exceptions for veterans and the homeless.

But if the goal is to help people find jobs and make more money, work requirements don’t actually do the job, wrote Kelsey Pukelis, a doctoral student in public policy at Harvard Kennedy School who has studied the issue. Rather, they make it much harder for people who need food aid to get it.

“Our findings do suggest that work requirements restrain federal spending by reducing the number of people getting SNAP benefits,” she explained. “But our work also indicates that in today’s context, these savings would be at the expense of already vulnerable people facing additional economic hardship at a time when a new recession could be around the corner.”

3. IRS funding takes a hit

The deal also takes aim at a big boost in spending Congress gave the Internal Revenue Service beginning in 2022 to crack down on tax cheats and upgrade its software. Democrats agreed to a Republican demand to cut the extra IRS funding from $80 billion to $70 billion.

Back in August 2022, Nirupama Rao, an economist at the University of Michigan, explained why Democrats included all that funding in their Inflation Reduction Act and how it would help the IRS collect more tax revenue, since the agency does not fully collect all the taxes that are owed.

“The main target of this spending is the so-called tax gap, which is currently estimated at about $600 billion a year,” she wrote. “While an $80 billion investment that returns $204 billion already sounds pretty impressive, it may be possible that it’s a conservative estimate.”

4. The hard road to compromise

It took a long time for Republicans and Democrats to get the current agreement.

Yellen warned in January that the government was about to hit the debt limit and would be unable to pay all its bills by May or June. McCarthy and House Republicans, who hold a razor-thin majority, appeared unwilling to raise the debt ceiling unless they could extract deep spending cuts. Meanwhile, Biden refused to negotiate, insisting on a clean debt ceiling bill. Both of those positions were dropped during negotiations.

Why did it take so long for them to reach a compromise?

Blame political trends that have been accelerating for decades, explained Laurel Harbridge-Yong, a specialist in partisan conflict and the lack of bipartisan agreement in American politics at Northwestern University. Many Republicans come from very safe districts, which means their primary against other conservatives is more important than the general election. This makes it more important to stand firm and fight until the bitter end.

“So you now have many Republicans who are more willing to fight quite hard against the Democrats because they don’t want to give a win to Biden,” she wrote. “Democrats are also resistant to compromising, both because they don’t want to gut programs that they put in place and also because they don’t want to make this look like a win for Republicans, who were able to play chicken and get what they wanted.”

5. Latest in a long line of fiscal crises

This was hardly the first fiscal crisis the U.S. government has faced. In fact, there have been many – including 22 government shutdowns since just 1976.

Raymond Scheppach, a professor of public policy at University of Virginia, offered a brief history of recent crises and the damage they’ve caused – and why a default would be far more consequential than past crises.

“While these were very disruptive and damaged the economy and employment, they pale in comparison to the potential effects of failing to lift the debt ceiling, which could be catastrophic,” he wrote. “It could bring down the entire international financial system. This in turn could devastate the world gross domestic product and create mass unemployment.”

Editor’s note: This story is a roundup of articles from The Conversation’s archives. Portions of this article originally appeared in a previous article published on May 2, 2023.

About the Author:

Bryan Keogh, Deputy Managing Editor and Senior Editor of Economy and Business, The Conversation and Matt Williams, Senior Breaking News and International Editor, The Conversation

This article is republished from The Conversation under a Creative Commons license. Read the original article.

By George Prior

The US economy and the nation’s credibility have already been damaged by the debt ceiling crisis even if a deal is struck next week, and “reform is now urgently required”, affirms the CEO of one of the world’s largest independent financial advisory, asset management and fintech organizations.

Nigel Green of deVere is speaking out following reports that Republican and White House officials are edging closer to an agreement to raise the debt limit and cap federal spending for two years.

He comments: “Tuesday is being reported as the likely day for a House vote on raising the US debt ceiling.

“Although this is not definite, and it might come right down to the wire and happen just hours before Treasury Secretary Janet Yellen says her department could run out of money.”

Regardless of whether a deal is done, and a default is avoided, which is the hope, the “US economy and the nation’s credibility have already been damaged,” says Nigel Green.

“This is evidenced by Fitch, a credit rating agency, late Wednesday putting the US government’s AAA debt rating on ‘negative watch’ as a result of the political brinkmanship between the White House and Congress over raising the debt ceiling.”

He continues: “Using the country’s debt as a political weapon, undermines confidence of investors in the US government amid concerns about the government’s ability to properly manage its finances.

“This loss of confidence will mean that it becomes more difficult for the US government to borrow money in the future, which could lead to higher interest rates and weaker economic growth.

“The debt ceiling drama also erodes some of the current global reserve currency’s credibility and reputation as a ‘safety asset’, which could have far-reaching repercussions for the US.”

The deVere CEO also recently argued that the debt ceiling crisis was the “ultimate gift” for America’s major geopolitical rival, China, which is seeking to promote the internationalisation of its own currency and to position itself as a more stable and attractive investment option, in order to attract more international investment and capital inflows.

“Whatever happens in debt ceiling talks this week between Democrats and Republicans, China’s massive PR machine is already spinning the narrative that the US is a declining power,” he noted.

With talks on a knife edge to contain this crisis, Nigel Green says that should this current situation be resolved, reform is “urgently required.”

He says: “I’m in favour of debt ceiling reforms that take away the threat of a US government default and all the implications of that, and reforms that make lawmakers in Washington truly accountable by automatically triggering spending cuts should the ceiling be reached.”

The deVere CEO and founder concludes: “We hope and expect a deal to be done to avoid a default. But it should never have got to this stage in the first place, as damage has already been done to US economic credibility.

“This must serve as a catalyst for reform.”

About:

deVere Group is one of the world’s largest independent advisors of specialist global financial solutions to international, local mass affluent, and high-net-worth clients.  It has a network of more than 70 offices across the world, over 80,000 clients and $12bn under advisement.

By George Prior 

The rising cost of living, economic uncertainty, and geopolitical issues have driven-up demand for financial advice by 21.2% over the last year, according to one of the world’s largest independent financial advisory, asset management and fintech organizations.

As the figures from deVere Group, which are based on enquiries from new and existing clients, are released, the company’s Regional Director shares questions you should ask when seeking a financial advisor.

Of the jump in demand, James Green comments: “As these findings underscore, more and more people are recognising the value of independent advice to secure their long-term financial goals.

“The overwhelming majority of new enquiries, our consultants report, are fuelled by concerns over the rising cost of living, economic uncertainty, and/or geopolitical issues.”

He continues: “Although it now seems to be easing somewhat, the cost-of-living is still rising.

“Last year’s cost-of-living crisis brought into sharp focus the need for people to manage their finances effectively.

“With a growing number struggling to successfully balance their income with expenses, save for goals such as homeownership, education, investments or retirement, or deal with rising debt burdens, they sensibly sought professional advice.”

Economic uncertainties have also acted as a catalyst. “Volatility in and disparities between stock markets and bond markets, the looming threats of a recession, longer-term inflation issues, and interest rate agendas, have prompted a growing number of individuals to better understand the market conditions, evaluate their investment portfolios, and make informed decisions about their personal financial situation,” notes James Green.

In addition, geopolitical issues, such as the US debt ceiling and possible default crisis, Brexit, the war in Ukraine, and rising tensions between China and the US, among others, have played their part.

“Major geopolitical matters such as these both directly and indirectly affect investment portfolios. As such they can knock you off track, financially.  It’s critical to consistently review and, where necessary, adapt financial strategies to the changing economic landscape.”

The deVere Director also says that technology is a likely contributing factor to the significant surge in demand for financial advice as it becomes more accessible to a broader audience.

“Fintech apps, online platforms, and other financial planning tools have made it easier for individuals to connect with advisors and receive guidance remotely. We believe this increased accessibility has contributed to the growing demand for financial advice over the last year.”

With demand jumping by almost a quarter in just 12 months, James Green says there are certain questions you should ask when looking to work with a new financial advisor.

Here’s what you should ask:

Is your company authorised to give financial advice by the appropriate regulatory authority?

“All advice should be completed by a company and an individual registered with the jurisdiction’s appropriate authority. This can be checked immediately on that body’s website.”

Does your company have a global presence?

“It makes sense to work with a company that’s located worldwide to make sure you receive continuity of service should you ever relocate. If long term service is required be sure to check the company has offices in your potential future destinations. The company should also be regulated in all the markets in which it operates where required.”

Do you have more than one option for the financial advice given?

“An independent advisory firm should be able to offer a range of trust services, product services and investment options. Ask them to show you several different options to give you peace of mind when agreeing to the advice.”

How long has your company been in operation?

“You should choose a company that has been operating in the marketplace for more than five years. This will provide a more accurate, longer-term gauge of the firm’s quality of advice, service and compliance history.

What is the total value of your company’s assets under management?

“Assets under management that total in excess of $10bn would suggest some degree of critical mass in the industry, a significant share of the market, longevity in the industry and a robust organisational structure.”

Do you offer full disclosure?

“All negotiations should be upfront and transparent from the start. Any agreements you enter into should disclose how charges are made, how much will be charged, service expectations and levels of protection.”

He adds that you must also be able to “build rapport and trust to successfully forge a long-term relationship with your advisor.”

James Green concludes: “Soaring demand for advice must be championed across the board as it helps people to make better financial decisions, improves their financial literacy, and gives them the best chance of achieving their goals and building a more secure financial future.”

About:

deVere Group is one of the world’s largest independent advisors of specialist global financial solutions to international, local mass affluent, and high-net-worth clients.  It has a network of more than 70 offices across the world, over 80,000 clients and $12bn under advisement.