Washington — The countdown to ais in the offing, with friction between President Biden and House Republicans raising alarm bells about whether the United States can fend off a potential economic crisis.
The Treasury Department projects the federal government will reach its statutory borrowing capacity of $38.381 trillion on Thursday, an artificially imposed ceiling that lawmakers have raised roughly 80 times since the 1960s. So far, markets remain calm as the government can temporarily rely on accounting adjustments to stay open, meaning any threat to the economy is several months away. Even many concerned analysts assume there will be a deal.
But this particular moment seems more tense than previous brushes with the debt limit because of the wide differences between Biden and the new speaker of the House of Representatives, Kevin McCarthy, who chairs a restive Republican caucus.
Those differences raise the risk that the government will default on its obligations for political reasons, a problem that could roil financial markets and, if left unaddressed, plunge the world’s largest economy into an entirely preventable recession.
Both have several months to reach an agreement, as the Treasury Department imposes “extraordinary measures” to keep the government running at least until June. But years of heightened partisan hostility have led to a set of conflicting demands that jeopardize the ability of US lawmakers to work together on a basic duty.
Biden insists on a clean increase in the debt limit so that existing financial commitments can be kept, refusing even to start talks with Republicans. McCarthy is calling for negotiations that he believes will lead to spending cuts. It’s unclear how much he wants to cut and whether his fellow Republicans would support any deal after a testy start to the new Congress that required 15 rounds of voting to.
Asked twice Wednesday if there was evidence House Republicans can guarantee the government will avoid a default, White House press secretary Karine Jean-Pierre said it is their “constitutional responsibility” to protect the faith and credit of the United States. She did not say whether the White House saw signs at this stage that a default was off the table.
“We’re just not going to negotiate that,” Jean-Pierre said. “They should feel the responsibility.”
For his part, McCarthy said Biden must acknowledge the political realities that come with a divided government. He equates the debt ceiling to a credit card limit and calls for a level of fiscal tightening that did not occur under President Donald Trump, a Republican who in 2019 signed a bipartisan suspension of the debt ceiling.
“Why create a crisis over this?” McCarthy said this week. “I mean, we have a Republican House, a Democratic Senate. We have the president there. I think it’s arrogant to say, ‘Oh, we’re not going to negotiate much of anything,’ and especially when it comes to funding.”
Any deal would also have to be approved by the Democratic Senate. Many Democratic lawmakers are skeptical about the ability to work with Republicans aligned with the “Make America Great Again” movement started by Trump. The MAGA movement has claimed that the 2020 election lost by Trump was rigged, a falsehood that contributed to the January 6, 2021 insurrection at the US Capitol.
“There shouldn’t be any risky politics with the debt limit,” said Senate Majority Leader Chuck Schumer of New York. “It is reckless for President McCarthy and the MAGA Republicans to attempt to use the full faith and credit of the United States as a political bargaining chip.”
To keep the government open, the Treasury Department on Thursday introduced a series of accounting maneuvers known as “extraordinary measures.” These measures suspended contributions and investment redemptions for government workers’ retirement and health care funds, giving the government enough financial space to handle its day-to-day expenses until about June.
It is unknown what happens if these measures are exhausted without an agreement to increase the debt limit. A prolonged default could be devastating, with markets falling and layoffs triggered by panic if confidence evaporates in a cornerstone of the global economy, the US Treasury note.
Bank of America analysts warned in a report Friday that “a high degree of uncertainty exists about the speed and magnitude of the damage the US economy would suffer.” The underlying challenge is that the government would have to balance its books on a daily basis if it does not have the capacity to issue debt. If the government cannot issue debt, it would have to impose annual cuts equivalent to 5% of the total US economy. But analysts say their benchmark case is the US avoiding default.
Still, if previous debt ceiling showdowns, like the one that occurred in 2011, are any guide, Washington may be in a nervous state of suspended animation with little progress until the “X date,” the deadline when they run out. extraordinary measures. That creates its own set of challenges.
“A deal probably won’t be reached until the last minute, raising the risk that the deadline to lift the ceiling will be inadvertently missed,” said Andrew Hunter, senior US economist at Capital Economics.