October 23, 2026
Another U.S. budget showdown could loom
The debt ceiling may soon become a dangerous political weapon again.
To the point!
"Should a confrontation arise, it is likely to be dramatic."
Why does the row over how much the U.S. can borrow so often end in a government shutdown? Have you ever wondered about that, too? You would be right to do so: the arrangement is an odd one. As far as I know, in every country – parliamentary approval of a budget that entails, say, €50 billion in net new borrowing also gives the government authority to borrow the money. Not in the U.S. (Denmark is the other sole exception worldwide).
There are two separate congressional procedures: one for approving the budget, and another for authorizing the borrowing needed to finance it. Until 1917, Congress even had to sign off on every government loan individually. Quite why this dual legislative track exists is difficult to say; its logic certainly escapes me. For decades, however, increases in the debt ceiling passed without incident. Since the Second World War, Congress has raised it more than 100 times – without a murmur.
2011 comes to mind
As Washington has become more polarized, though, the debt ceiling has increasingly been wielded as a political weapon – whenever one party controls the House of Representatives while the other party holds the White House. That can be dangerous. If Congress were stubbornly to refuse to raise the ceiling, this could, in the worst case, result in a technical default – a failure by the federal government to meet its financial obligations it had already incurred.
The summer of 2011 was a particularly close call. Barack Obama was the occupant in the White House, while Republicans had won control of the House of Representatives in the midterm elections. You may remember the so-called Tea Party, the movement Newt Gingrich launched in the 1990s. It was the first movement within the Republican Party to make confrontation and disruption its political trademark. The debt ceiling gave it an effective way to back the detested Democratic president into a corner. Obama offered tax increases to reduce the deficits. The Tea Party would have none of it. It wanted to force the president to cut spending programs close to Democrats‘ hearts. The U.S., meanwhile, drifted alarmingly close to default. With only days to spare until Day X, the government was on the verge of being unable to meet its debt payments. Eventually Obama blinked, and the House lifted the debt ceiling. Republicans had prevailed. Congress held the upper hand and forced its will on the administration.
I remember the episode well. At the time, I worked for the ratings agency Standard & Poor’s (now S&P Global) and served on the committee that downgraded the U.S. credit rating for the first time in history, to AA+ from AAA. The risk of an accident born of political polarization was simply too great. Flirting with default to subdue political opponents is not a way to run a country, much less so a top-rated one.
Is another debt-ceiling crisis likely?
The statutory U.S. debt ceiling – the maximum amount the federal government is permitted to borrow – currently stands at $41.1 trillion. At the present rate of borrowing, that threshold is likely to be reached before long. U.S. debt passed $40 trillion in early September. If Democrats take control of the House in the midterm elections in early November, another confrontation is all but inevitable – unless the Republican majority raises the ceiling again in the lame-duck period before the new Congress is sworn in in January.
Should a confrontation arise, it is likely to be even more dramatic than in 2011. Hostilities between the parties are more intense than ever before. The current U.S. president, moreover, has so far shown little willingness to compromise. Nor is it easy to see a Democratic majority extending an olive branch to a president who has branded its members “extremists,” “jihadists” and “terrorists.”
We must all hope that, despite it all, enough politicians in D.C. still put the national interest above partisan interests. A U.S. default would be a catastrophe for capital markets. In every financial crisis, U.S. Treasury securities have served as a safe haven. We can only speculate about what would happen if politics were to turn that supposedly safe haven into a minefield – and dread the prospect.
If the U.S. were to default, Europe would not escape unscathed. The financial crisis that began in the U.S. in 2008 as the subprime crisis also morphed into the eurozone sovereign-debt crisis. There is every reason to keep our fingers crossed. Or pray!
Dr. Moritz Kraemer, Chief Economist / Head of Research at LBBW
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