On Thursday, the United States government reached its statutory limit on the amount of money it can legally borrow to meet its day-to-day obligations. These include social security payments, medical benefits, military salaries and interest on its national debt.
It does not mean that the US will not be able to pay its bills – at least not yet. But it does mean that the US Department of the Treasury will have to put in place what are known as “extraordinary measures” – essentially accountancy manoeuvres – governing how it spends money to keep afloat financially.
Technically it will start by redeeming existing and suspending new investments in retirement plans for the civil service, postal workers and federal government employees. After that it could use cash on hand to keep the government going.
Treasury secretary Janet Yellen said last week that adopting these extraordinary measures would allow the US government to meet its obligations, at least until the beginning of June.
However, in the absence of a new political agreement on the amount the country can legally borrow or the suspension of the legal debt limit, the US could run out of money to pay its debts sometime after that.
Economists have estimated that any actual default would likely not take place until early in the third quarter. Yellen, in a letter to the speaker of the House of Representatives, Kevin McCarthy, last Friday, said that the treasury could not estimate at this stage how long the extraordinary measures would enable the government to meet its obligations as this will depend, for example, on the level of tax revenue received.
At present, the US government is limited by law to borrowing no more than $31.4 trillion.
US president Joe Biden has consistently highlighted that, under his administration, the country’s federal deficit has fallen. However there is still a gap between government spending and revenue, and this will need to be funded by increased borrowing.
The issue of debt is of significant importance to those on the right in US politics – although less was said about it by them during the presidency of Donald Trump
This is not the first time there has been a dispute over the debt ceiling. It has been the subject of rows, on and off, for decades. Raising the debt ceiling was among the disputes that caused two shutdowns of the federal government in late 1995 and early 1996. Another row took place in 2011, spooking financial markets and prompting Standard & Poor’s to issue the first-ever downgrade of the US government’s credit rating.
Ultimately, deals have always been reached that avoided a default. But this time it could possibly be different.
Republicans now control the US House of Representatives, albeit with a very small majority. The issue of debt is of significant importance to those on the right in US politics – although less was said about it by them during the presidency of Donald Trump.
In December, the right-wing Heritage Foundation urged the new Republican-controlled House not to give an inch on the debt ceiling. “With the nation at unprecedented levels of indebtedness, the choice in this fight is a stark one: a path toward stability or fiscal Armageddon,” it said.
Republican members of Congress appear to want to use the debt ceiling limit as leverage to force the Biden administration to accept sweeping spending cuts – measures strongly opposed by Democrats – in areas such as Medicare, social security, Medicaid, education, research and other critical services.
A big political showdown now seems inevitable.
Yellen said in her letter last week that it was critical that the US Congress either raised or suspended the official debt ceiling.
“Failure to meet the government’s obligations would cause irreparable harm to the US economy, the livelihood of all Americans and global financial instability,” she said.
Ms Yellen maintained that, in the past, even threats of a default had caused “real harms” including the only credit rating downgrade in US history in 2011. In September 2021, when there was a previous standoff between Democrats and Republicans over the debt ceiling, Moody’s Analytics warned a prolonged crisis could lead to a full recession, wiping out billions of dollars in economic growth and eliminating up to six million jobs in the US.
As of now there are no signs of compromise on the debt issue. “The debt ceiling is no doubt going to be a knife fight,” Texas Republican Tony Gonzales told Fox News in the US last Sunday. Another senior House Republican, James Comer, said his party would not “budge” on demands for federal spending cuts in return for agreeing to lift the debt ceiling and avoid a US payment default.
McCarthy’s own room for manoeuvre is limited given his small majority and on foot of concessions he made to his right wing to secure the votes to become speaker
Florida Republican senator Rick Scott warned that a “day of reckoning is coming”.
“It’s long past time for Washington to end the reckless spending of taxpayer dollars and start living within its means,” he said.
McCarthy has signalled Republicans are interested in a deal with Biden that would impose a spending cap in exchange for temporarily raising the debt ceiling. McCarthy said he hoped to “sit down with [Biden] early” to work through fiscal issues including the debt ceiling.
However, McCarthy’s own room for manoeuvre is limited given his small majority and on foot of concessions he made to his right wing to secure the votes to become speaker. As part of this agreement, just one member can now essentially table a vote of confidence to try to oust him from his post.
The Washington Post reported that also under the deal between McCarthy and right-wing members of his party, Republicans were working on a plan for the US government to make payments only in critical areas if it reached the limit on borrowing. These could include interest payments, social security, funding of the military and veterans’ benefits.
But any such move would still leave large parts of the federal government unfunded, such as the Medicaid programme that provides healthcare for people with limited incomes.
The Biden administration has said it will refuse to negotiate over the debt limit and that it should be raised by Congress without any conditions. “It should not be a political football. This is not political gamesmanship, and this should be done without conditions,” the White House said last week.