US out of the woods on debt – but for how long?

The United States Government has pulled itself back from the precipice.

After weeks of tension, a bill allowing the debt ceiling to be raised has been signed into law by President Barack Obama after gaining the approval of Congress. It means the US will be able to borrow more money and fulfil its financial commitments, preventing the world’s largest economy from going into default.

In order to pass the bill allowing the country to borrow more, politicians agreed a series of measures to cut back spending.

The law raises the debt limit by up to $2.4tn (£1.5tn) from $14.3tn, and makes savings of at least $2.1tn in 10 years.

The bill cleared its final hurdle in the Senate by 74 votes to 26.

In a Rose Garden statement following the agreement, President Obama said this was a first step toward ensuring the US lives within its means.

He added that “defaulting would have devastated” America’s economy and that both the Democrats and the Republicans share power in Washington and “both parties must take responsibility”.

More problems ahead?

However, economists have told Channel 4 News that there could even be bigger problems ahead for the debt-laden US.

Bloomberg TV’s Economics Correspondent and a fellow in economics at Oxford University, Dr Linda Yueh, said the crisis had “cast a light” on the fiscal challenges faced by the US, putting them in “stark relief”.

“We have known for some time that the US had a debt burden that was spiralling because of the ageing population as well as the stimulus used in the last recession,” she said.

She said the US was one of the the last major economies to put in place a deficit reduction plan – until now. But the lack of detail meant that there was still no clarity for the future.

“They still don’t have a plan for debt stability. All we know is that they have empowered a commission to come up with $1.5tr in cuts by the end of the year.

“Given the amount of debt the US is facing, the fact there isn’t that degree of detail is still a bit of a concern. It’s like they passed one hurdle but there’s a bigger one looming,” she warned.

Questions to answer

Lea Tyler, US expert at forecasting company Oxford Economics, said the short-term crisis had been averted, but warned there were long-term questions for the US to address.

She told Channel 4 News: “The immediate crisis – which was only a crisis because we made it one, that the Treasury didn’t have the funds to pay its obligations – that we have settled for now. But we still have lots of questions to answer.

“There is an issue about the ageing population, issues around healthcare. The fact that there is too much unemployment, not enough growth in the economy, or payroll growth, or job creation – that’s a really serious problem that needs addressing. We’ve been distracted by this other stuff, particularly in the last month.”

And Dr Yueh said the crisis in the US merely reinforced the wider sense that western economies are struggling while those in the east, particularly China, are in a wholly different position.

“There has been a shift in economic weight and economic growth towards China and Asia going on for some time. This has been put into stark relief now because China seems to have decoupled. It faces its own challenges but nothing quite like the debt-laden growth challenges faced by the west,” she said.

“People have been aware of America’s problems for some time but now they’re really aware.”