What is the US debt ceiling and what it could mean for Australia

With US President Joe Biden recently cancelling his visit to Australia to deal with the “debt ceiling crisis”, some people might be wondering what this crisis even is and what it could mean for the world economy.

Essentially, the US debt ceiling is the limit on the amount of money the US government can actually borrow and is currently sitting at $31.4 trillion. Majority approval is required by both chambers of congress for the ceiling to be raised.

With the House of Representatives being controlled by the Republicans and the Senate by the Democrats, this is where we find the current impasse—Republicans want a pause on Government spending.

What are the consequences of the US hitting the debt ceiling?

If the US government were to default on its debt, this would spell bad news for not just the US but the global economy. Basically, by defaulting on their debt, the US government wouldn’t be able to fund its operations like medicare and social security.

The US defaulting on its debt would also mean that the American economy would likely fall into recession which, according to Treasury Secretary Janet Yellen, would be "a downturn as severe as the Great Recession". 

How does this affect the Australian economy?

If the US were to default, the resulting effects on an already strained global economy would be bad news for Australia. This is because our economy is highly integrated with the rest of the world and has an investment relationship with the US that is worth more than A$1.47 trillion combined

Suffice to say, no matter how well we manage the economy, the ripple effects of a US default would be terrible for us. 

So, with all this doom and gloom, it’s important to point something out—the US has raised the debt ceiling 78 times since 1960 and, despite the political back and forth, a deal has always been struck due to how severe the consequences of a default would actually be. 

At the end of the day, it remains to be seen what will happen. It’s important to remember, however, that there are always things that you can do to make sure your own financial situation is in a good place. 

If you’re looking to get better control over your finances and be more prepared for a rainy day, Mozo can help. We offer a range of guides on better budgeting, banking apps and even how to choose a good savings account.