US debt ceiling: What is it and how devastating would a default be?
Efforts to prevent the United States reaching its debt limit and to avert a potentially catastrophic default on loan repayments on Wednesday move to the House of Representatives, where the vote on the proposal to raise the debt ceiling takes place.
President Joe Biden and leader of the House of Representatives, speaker Kevin McCarthy, had spent the Monday memorial day holiday shoring up support among Democrats and Republicans respectively for the agreement.
The pair had agreed a plan on Saturday for the debt limit to increase and for spending caps and work requirements to be introduced. The agreement between the leaders must now gain approval of the two chambers of congress in less than a week before the default deadline is reached on Monday.
A single opposition vote could derail progress through congress and bring the US into its first ever default, with potentially disastrous consequences for the global economy.
What’s happening this week?
Members of the Republican majority House of Representatives are to vote on the proposed agreement on Wednesday. If approved, the proposal will move to the Democrat-controlled Senate on Friday.
But it first faces an uphill battle in the House as Republican representatives have already voiced their opposition.
Ten far right leaning House Republicans are expected to vote no, believing controls on spending in the agreement to be insufficient. Republicans generally seek to shrink, rather than expand, the country’s debt.
Some Democrats too are unhappy with the deal. The deal’s planned 3.3% increase in defence spending may lead to members of both parties seeking amendments to make sure military spending rises in line with inflation, which in the US is just below 5%.
Passage in the House on Wednesday is key to bringing the vote to the Senate on Friday.
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What’s in the debt ceiling deal?
The main purpose of the deal is to increase the US debt limit from $31.4trn (£25.3trn). The agreement does this by suspending the borrowing limit until January 2025 – after the next US presidential elections – rather than setting a new level.
Biden and the Democrats have made concessions to Republicans in the hopes they will back a deal. As Republicans are sceptical of government spending and seek smaller government, the deal promises spending cuts and policy concessions.
Quite how deep those spending cuts are depends on who you ask.
The White House is saying government spending would come down by $1trn, though official figures have not been released. The New York Times are reporting cuts of $136bn (£109.7bn) will be made.
Under the agreement, some social welfare recipients will be subject to new work requirements.
The bill would also end the student loan freeze Biden introduced and require former students to recommence payments.
It also revokes funding for the US tax collection authority, the IRS. Democrats had dedicated $80bn for the authority to hire more employees to boost tax enforcement, collecting more funds to implement state spending plans.
Ultimately the agreement is trying to stop a government shutdown. A deal is needed because any extension, or pause in the debt limit, needs the approval of congress.
Why does defaulting matter?
As the world’s largest economy has never before defaulted the exact consequences are uncertain but are likely to be catastrophic to the US and global economy.
The US would run out of money and no longer be able to pay its bills. Civil servant wages, social welfare payments, health insurance – known as Medicare – would go unpaid.
If the US no longer pays interest on its bonds, IOUs it issued to raise funds, it would default on debt payments.
The country’s credit rating would go down If it defaults on debt payments. A vital way the country raises money – selling bonds – could be at risk as markets will see US government debt as insecure and charge more to lend to the US.
Economic research organisation Moody’s Analytics said a prolonged period where US bills can’t be paid would lead to a nearly 20% drop in stock prices, economic contraction of 4% and the loss of more than seven million jobs.
The White House Council of Economic Advisers estimated the economy could shrink by as much as 6.1% after such a prolonged period.
Global shocks
The country would likely enter recession, which would harm the global economy as the US trades with so much of the world and is the bedrock of the worldwide financial system.
A fall in the value of US bonds would also harm economies across the world as investors could become concerned about other countries defaulting and seek to be paid more to lend to other nations.
US bonds and stocks are owned by pension funds across the world and with a drop in their values would come a drop in pension values.
US Treasury Secretary Janet Yellen
When could default happen?
To prevent default an agreement must be reached by Monday 5 June, which the US Treasury Secretary, Janet Yellen, set as the deadline to raise the debt ceiling beyond the current $31.4trn (£25.3) limit.
A date as early as 1 June had been thought to be the default date before the precise deadline was set by Ms Yellen.
US
Donald Trump plans to hit Canada with new tariff – while warning of blanket hike for other countries
Donald Trump has said he plans to hit Canada with a 35% tariff on imported goods, as he warned of a blanket 15 or 20% hike for most other countries.
In a letter to Canadian Prime Minister Mark Carney, the US president wrote: “I must mention that the flow of Fentanyl is hardly the only challenge we have with Canada, which has many Tariff, and Non-Tariff, Policies and Trade Barriers.”
Mr Trump’s tariffs were allegedly an effort to get Canada to crack down on fentanyl smuggling, and the US president has expressed frustration with Canada’s trade deficit with the US.
In a statement Mr Carney said: “Throughout the current trade negotiations with the United States, the Canadian government has steadfastly defended our workers and businesses. We will continue to do so as we work towards the revised deadline of August 1.”
He added: “Canada has made vital progress to stop the scourge of fentanyl in North America. We are committed to continuing to work with the United States to save lives and protect communities in both our countries.”
Mr Trump has sent a series of tariff letters to 23 countries so far, including one putting a 50% tariff on Brazil in part for the ongoing trial of its former president Jair Bolsonaro for trying to stay in office after he lost the election in 2022.
Mr Trump was similarly indicted for his efforts to overturn his election loss in 2020.
The higher rates would go into effect on 1 August.
Shortly after Mr Trump unveiled his “Liberation Day” tariffs on 2 April, there was a huge sell-off on the financial markets. The US president later announced a 90-day negotiating period, during which a 10% baseline tariff would be charged on most imported goods.
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But in an interview with Sky News’s partner network NBC News, Mr Trump said he plans to impose higher blanket tariffs on most US trade partners.
“We’re just going to say all of the remaining countries are going to pay, whether it’s 20% or 15%. We’ll work that out now,” he said.
He added: “I think the tariffs have been very well-received. The stock market hit a new high today.”
The US and UK signed a trade deal in June, with the US president calling it “a fair deal for both” and saying it will “produce a lot of jobs, a lot of income”.
Sir Keir Starmer said the document “implements” the deal to cut tariffs on cars and aerospace, adding: “So this is a very good day for both of our countries – a real sign of strength.”
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The US president also teased a “major statement” he will make on Russia over its war with Ukraine.
“I’m disappointed in Russia, but we’ll see what happens over the next couple of weeks,” he said.
“I think I’ll have a major statement to make on Russia on Monday.”
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It comes as Russia’s deputy foreign minister, Sergei Ryabkov, said a new round of talks between Moscow and Washington on bilateral problems could take place before the end of the summer.
A Palestinian activist who was detained for over three months in a US immigration jail after protesting against Israel is suing Donald Trump’s administration for $20m (£15m) in damages.
Lawyers for Mahmoud Khalil have filed a claim against the administration alleging he was falsely imprisoned, maliciously prosecuted and smeared as an antisemite as the government sought to deport him over his role in campus protests.
The 30-year-old graduate student at Columbia University told Sky News’s lead world presenter Yalda Hakim being detained by ICE agents in March “felt like kidnapping”.
He described “plain-clothed agents and unmarked cars” taking him “from one place to another, expecting you just to follow orders and shackled all the time”, which he said was “really scary”.
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Mahmoud Khalil reunites with family after release
Mr Khalil said he was not presented with an arrest warrant and wasn’t told where he was being taken.
He said the detention centre he was taken to was “as far from humane as it could be” and “a place where you have no rights whatsoever”.
“You share a dorm with over 70 men with no privacy, with lights on all the time, with really terrible food. You’re basically being dehumanised at every opportunity. It’s a black hole,” he added.
Mr Khalil said he would also accept an official apology from the Trump administration.
The Trump administration celebrated Mr Khalil’s arrest, promising to deport him and others whose protests against Israel it declared were “pro-terrorist, antisemitic, anti-American activity”.
Mr Khalil said after around 36 hours in captivity he was allowed to speak to his wife, who was pregnant at the time.
“These were very scary hours, I did not know what was happening on the outside. I did not know that my wife was safe,” he said.
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‘Absolutely absurd allegations’
Mr Khalil said administration officials had made “absolutely absurd allegations” by saying he as involved in antisemitic activities and supporting Hamas.
“They are weaponising antisemitism, weaponising anti-terrorism in order to stifle speech,” he said. “What I was engaged in is simply opposing a genocide, opposing war crimes, opposing Columbia University’s complicity in the war on Gaza.”
A State Department spokesperson said its actions toward Mr Khalil were fully supported by the law.
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Asked about missing the birth of his son while he was in prison, Mr Khalil said: “I don’t think there’s any word that can describe the agony and the sadness that I went through, to be deprived from such a divine moment, from a moment that my wife and I had always dreamed about.”
Meanwhile, the deportation case against Mr Khalil is continuing to wind its way through the immigration court system.
Donald Trump has praised the Liberian president’s command of English – the West African country’s official language.
The US president reacted with visible surprise to Joseph Boakai’s English-speaking skills during a White House meeting with leaders from the region on Wednesday.
After the Liberian president finished his brief remarks, Mr Trump told him he speaks “such good English” and asked: “Where did you learn to speak so beautifully?”
Mr Trump seemed surprised when Mr Boakai laughed and responded he learned in Liberia.
The US president said: “It’s beautiful English.
“I have people at this table who can’t speak nearly as well.”
Mr Boakai did not tell Mr Trump that English is the official language of Liberia.
The country was founded in 1822 with the aim of relocating freed African slaves and freeborn black citizens from the US.
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Mr Trump promised the leaders of Liberia, Senegal, Gabon, Mauritania and Guinea-Bissau a pivot from aid to trade at the surprise meeting.
He described the countries as “all very vibrant places with very valuable land, great minerals, and great oil deposits, and wonderful people”.
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Later asked by a reporter if he’ll visit the continent, Mr Trump said, “At some point, I would like to go to Africa.”
But he added that he’d “have to see what the schedule looks like”.
Trump’s predecessor, President Joe Biden, promised to go to Africa in 2023, but only fulfilled the commitment by visiting Angola in December 2024, just weeks before he left office.
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