Advocacy News – June 2, 2023
The federal debt ceiling is a critical issue that affects the financial stability of the state and nation.
Late yesterday evening, the U.S. Senate passed the debit ceiling deal – aka the Fiscal Responsibility Act of 2023 – that was reached earlier between the President and Congress. It has been agreed to by the U.S. House of Representatives Wednesday with a majority of both the Republican and Democratic caucuses supporting after often tense negotiations.
The action avoids a potential federal default and government shutdown while laying the groundwork for key infrastructure projects and environmental permitting reforms as well as more responsible fiscal policy moving forward.
The Michigan Chamber has been closely following this process and monitoring the effects of the debt ceiling deal alongside the U.S. Chamber.
A Brief History
The debt ceiling was instituted just before World War II and is the legal limit set by Congress on the amount of debt the government can accumulate. Once the limit is met, Congress must pass legislation to raise the debt ceiling and allow the government to continue borrowing.
This limit has been raised dozens of times due to several factors including inflation, population growth, and of course government spending. If the debt limit is not increased, the equivalent of a government shutdown takes place.
What Michigan Experts Said
“There is a deep belief that the United States can never default on its obligations. It is based on history: the U.S. has never defaulted. This belief also comes from the fact that all U.S. debt is denominated in the U.S. dollar, which is not the case in many other countries. It’s further enhanced by global perceptions of the U.S. as a leader in the world’s financial system over the last 80 years.”
– Andrei Simonov is the Philip J. May Endowed Professor in Finance at Michigan State University
and chair of the Department of Finance in its Broad College of Business.
Betsey Stevenson, a University of Michigan professor of public policy and economics who served as the chief economist of the U.S. Labor Department from 2010-11, shared this about what might happen if Congress is unable to reach a deal: “there may not be a catastrophe on the first day that the Treasury is unable to pay all its bills. However, ultimately the Treasury must be able to issue new debt to avoid an economic catastrophe. The sooner this happens, the lower the ultimate costs to American households and businesses.”
Averting Impacts on Michigan Businesses
The deal passage helps avoid the following serious consequences for consumers and businesses across the Great Lakes State and country.
- Uncertainty in the Financial Markets: The debt ceiling issue can create uncertainty in the financial markets, leading to increased volatility and cautious investor sentiment. This uncertainty may affect businesses’ ability to secure funding, raise capital or make long-term investment decisions.
- Interest Rates and Borrowing Costs: A prolonged debate or potential default on the debt could impact interest rates, which raises borrowing costs for businesses. Increased borrowing costs can restrict access to credit, limiting expansion plans and investments for Michigan businesses.
- Government Contracts and Spending: A failure to raise the debt ceiling could lead to a government shutdown, affecting federal contracts and spending. This interruption in government operations can impact Michigan businesses that rely on government contracts, such as defense contractors or suppliers to federal agencies.
- Consumer Confidence and Spending: A prolonged debate over the debt ceiling can also affect consumer confidence, leading to cautious spending patterns. Michigan businesses reliant on consumer demand, such as retail, hospitality, and tourism, may experience a decline in sales if consumers become more conservative with their expenditures.
- Infrastructure and Economic Development: Michigan has been actively investing in infrastructure and economic development projects, such as transportation networks and revitalization initiatives. Any disruption caused by a debt ceiling impasse could delay or hinder the progress of these projects, impacting businesses, communities and workforce that rely on improved infrastructure for growth.
For questions or more information, contact the MI Chamber’s Business Advocacy Team at info@michamber.com.