The U.S. government hit its $31.4 trillion debt limit on Thursday, amid a standoff between President Joe Biden’s Democrats and the Republican-controlled House of Representatives on lifting the ceiling, which could result in a fiscal crisis in a few months.
Treasury Secretary Janet Yellen told congressional leaders including House Speaker Kevin McCarthy that her department had started using drastic cash management measures that could avoid default until June 5.
Republicans, with a newly formed House majority, intend to use the time until the Treasury’s emergency maneuvers are used up to deliver spending cuts from Biden and the Democratic-led Senate. Corporate leaders and at least one credit ratings agency cautioned a long standoff could disrupt markets and unsettle an already weak global economy.
Yellen cautioned that the June date was subject to “considerable uncertainty” caused by the challenge of predicting payments and government revenues months into the future. Yellen told congressional leaders in a letter Thursday:
“I respectfully urge Congress to act promptly to protect the full faith and credit of the United States.”
But there was no sign that either Biden’s Democrats or Republicans were willing to compromise.
Republicans are attempting to use their small House majority and the debt ceiling to drive cuts to government programs, and contend that the Treasury could stave off the default during a standoff by prioritizing debt payments. This idea has been looked into in past standoffs, but financial experts have disputed its feasibility.
The White House is dismissing the idea out of hand.
“There will be no negotiations over the debt ceiling,” White House deputy press secretary Olivia Dalton restated Thursday aboard Air Force One. “Congress must address this without conditions as they did three times under (Republican former President) Donald Trump,”
‘Every Time’
The possibility for brinkmanship has sparked concerns in Washington and on Wall Street about a bruising battle over the debt ceiling this year that could be at least as disruptive as the prolonged battle of 2011, which triggered a downgrade of the U.S. credit rating and years of forced military and domestic spending cuts.
Moody’s Investors Service on Thursday said it was confident Congress would clinch a deal to stave off default, but that negotiations would go down to the wire, leading to market volatility.
“We’re not going to default on the debt. We have the ability to manage, service, and pay our interest. But we similarly should not blindly increase the debt ceiling,” Representative Chip Roy, a leading conservative, told Reuters.
Roy ignored concerns about rattling markets and risking a recession. He said in an interview:
“That’s what they say every time. It’s like clockwork. We’re already barreling toward a recession. The question is what it’s going to look like – unless the combination of monetary policy and fiscal policy saves us from our stupidity of having spent so much money.”
But corporate leaders voiced concern over the standoff. Goldman Sachs Group Inc (GS.N) Chief Executive David Solomon said in an interview on Thursday:
“I’m concerned and I’m going to take any opportunity that I can, and we can as a firm, to engage with people in Washington to try to make sure they understand that we don’t think that this is something that should be played with.”
Senate Republican leader Mitch McConnell forecast that the debt limit would be lifted sometime in the first six months of 2023 under conditions reached by Congress and the White House.
“It’s always a rather contentious effort,” McConnell told reporters at the University of Louisville.
“The important thing to remember is that America must never default on its debt. It never has, and it never will,” McConnell said, adding, “The very basic business of funding the government has become very controversial in my party.”
Congress approved a comprehensive debt limit, the statutory maximum of debt the government can issue, in 1939, planning to limit its growth. The measure has not had that outcome, as, in practice, Congress has handled the annual budget process — deciding how much money to spend — separately from the debt ceiling — basically, agreeing to cover the costs of previously passed spending.
The Republican plan involves balancing the federal budget in 10 years by pegging discretionary spending at 2022 levels.
Meanwhile, House Republicans promise to reject sweeping government funding bills from Senate Majority Leader Chuck Schumer, akin to the $1.66 trillion bipartisan omnibus package that Congress approved in late 2022.
Schumer, the Senate’s top Democrat, said in a statement:
“Political brinkmanship with the debt limit would be a massive hit to local economies, American families and would be nothing less than an economic crisis at the hands of the Republicans.”
“We are optimistic that Democrats will come to the table and negotiate in good faith,” said Republican Representative Ben Cline, who chairs a conservative task force on the budget and spending.
“There’s a lot of room to negotiate when it comes to steps that can be taken to address the fiscal crisis that we find ourselves in.”
