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ALEX BRUMMER: The USA's looming debt crisis

Hey big spender: President Biden's admirers suggest his tax largesse makes him the natural successor to former 'big government' Democrats Franklin D Roosevelt and Lyndon B Johnson

Looming US debt crisis: Biden’s big spending has hit the ceiling… now the critical moment has arrived, says ALEX BRUMMER

President Biden has recently received praise for his big spending – aimed at transforming the US economy.

Fans have even gone so far as to suggest that the tax largesse, approved when Democrats had a majority in the House of Representatives, made him the natural successor to former “big government” Democrats Franklin D Roosevelt and Lyndon B Johnson, authors of the New Deal. and the Great Society respectively.

Biden spent like there was no tomorrow. Among other things, his administration canceled $400 billion in student debt, passed a $1 trillion infrastructure renewal bill, and an “Inflation Reduction Act” that spends $397 billion on climate change projects (much to the dismay of the UK and EU).

Hey big spender: President Biden's admirers suggest his tax largesse makes him the natural successor to former 'big government' Democrats Franklin D Roosevelt and Lyndon B Johnson

Hey big spender: President Biden’s admirers suggest his tax largesse makes him the natural successor to former ‘big government’ Democrats Franklin D Roosevelt and Lyndon B Johnson

He ended 2022 with a bang as a $1.7 trillion spending bill.

Republicans backed a package that included a huge increase in defense spending and billions in aid to Ukraine.

The critical moment has arrived for the United States as largely unfunded spending hits the debt ceiling.

Technically, the United States hit its borrowing limit of $31.4 trillion yesterday. If a debt crisis or possible default is to be averted, US Treasury Secretary Janet Yellen will have to press the emergency button to delay a series of programs.

With a budget deficit that now represents 120% of US output, the third highest in the G7 after Japan and Italy, the coming crisis is having an impact on the dollar. This is one of the reasons why the pound has recently staged a revival.

London-based viewers might manage a wry smile. Yellen was among the most vocal critics of Trussonomics last September, contributing to market chaos.

Yet Britain’s debt to GDP ratio at 97% is comparatively less of a threat.

The difficulty for Biden, the US Treasury and global markets is that the shift in control in Congress, which brought Republican Kevin McCarthy of California to the presidency, means that fiscal policy is now in hostile hands.

The midterm election results in November were seen as a victory for Biden and the Democrats because Trump-style populism was undone. Maybe, but a more lasting legacy can be a budget dead end.

Fiscally conservative Republicans, the broad equivalents of Rishi Sunak and Jeremy Hunt, want to stop the great spending steamroller and are determined enough to force a showdown if the going gets tough.

Yellen identified some $428 billion in interim savings, such as suspending some payments to public service pension funds. Imagine how good that could be in Whitehall!

She could also prioritize debt payments, but that would leave the Pentagon scrambling for cash amid a major war in Europe and a game of strategic chess in the South China Sea.

Such measures could allow the US Treasury to pay its bills until June.

Some forecasters believe that with smart accounting, Yellen could delay the trigger point until the fall. Standoffs over debt and having to send federal workers home for lack of authorization to pay are not uncommon in Washington.

The big worry is that politics is so raw and divided on Capitol Hill that it could be 2011 all over again, when the country is a hair’s breadth from default.

Standard & Poor’s downgraded the US credit rating by one notch and, just as significantly – from an investor perspective – the S&P index fell 15%, with stocks of the companies most exposed to government spending US government having fallen by 25%.

BAE Systems, which earns big bucks from the US Department of Defense and other UK companies exposed to US aerospace, such as Melrose-owned GKN Aerospace, could potentially find themselves in the secondary crosshairs.

It is not in the interests of Congress, the US government, or the global economy to allow a default to occur.

In Davos this week, the IMF reiterated that global output is weak and it expects growth in 2023 to slow to 2.7% from 3.2% last year.

As seen with the election of McCarthy, who won a record 15 ballots in four days, Capitol Hill is divided.

Unruly right-wing legislators have been appointed by the President to chair committees. Troubling times lie ahead as the United States grapples with Biden’s debt overhang.

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