WASHINGTON (AP) – Countdown to possible U.S. government default Friction between U.S. President Joe Biden and House Republicans has raised concerns about whether the U.S. can avoid a potential economic crisis.
treasury project The federal government will reach its legal borrowing capacity of $38.381 trillion on Thursday, an artificially imposed ceiling that lawmakers have increased roughly 80-fold since the 1960s. So far, markets have remained calm as the government can temporarily rely on accounting adjustments to keep it open, meaning any threat to the economy will be months away. Even many worried analysts think a deal will be reached.
But this particular moment appears to be more fraught than past debt-ceiling swipes due to wide-ranging disagreements between Biden and incoming House Speaker Kevin McCarthy, who presides over a volatile Republican caucus..
The differences raise the risk that the government could default for political reasons, an issue that could roil financial markets and, if not addressed, tip the world’s largest economy into a wholly avoidable recession.
The pair have months to reach an agreement as the Treasury implements “extraordinary measures” to keep the government functioning until at least June. But years of growing partisan animus have led to a series of conflicting demands, jeopardizing the ability of U.S. lawmakers to cooperate on a fundamental duty.
Biden insisted on raising the debt ceiling completely in order to maintain existing fiscal commitments, and even refused to start negotiations with Republicans. McCarthy called for negotiations that he believed would lead to spending cuts. It was unclear how much he wanted to cut and whether his fellow Republicans would support any deal after a rocky start to the new Congress, which needs 15 ballots to elect Speaker McCarthy.
Asked twice on Wednesday whether there was evidence House Republicans could secure the government from default, White House press secretary Karin Jean-Pierre said it was their “constitutional duty” to protect the full integrity and integrity of the United States. She did not say whether the White House was seeing signs of a default at this stage.
“We’re just not going to negotiate about it,” Jean-Pierre said. “They should feel responsible.”
McCarthy said Biden needs to recognize the political realities of a divided government. He has equated the debt ceiling with credit card limits and called for some fiscal austerity, while President Donald Trump, a Republican, signed a bipartisan suspension of the debt ceiling in 2019.
“Why create a crisis for this?” McCarthy said this week. “I mean, we have a Republican House, a Democratic Senate. We have a president there. I think it’s arrogant to say ‘oh, we’re not negotiating on almost anything,’ especially when it comes to funding. “
Any deal would also need to pass the Democratic Senate. Many Democratic lawmakers doubt they can work with Republicans to align with Trump’s “Make America Great Again” campaign. The MAGA movement’s claim that the 2020 election that Trump lost was rigged led to the January 6, 2021 riots at the US Capitol.
“There should be no political brinkmanship on the debt ceiling,” Senate Majority Leader Chuck Schumer (DN.Y) said. “Speaker McCarthy and the MAGA Republicans are reckless in trying to use the entire trust and credibility of America 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”. The measures suspend contributions and investment redemptions to government workers’ retirement and health care funds, giving the government enough fiscal space to handle its day-to-day expenses until about June.
It is unclear what will happen if those measures are exhausted without a deal to raise the debt ceiling. If confidence in the bedrock of the global economy evaporates, a prolonged default could be devastating, with markets crashing and panic leading to layoffs, the U.S. Treasury Department noted.
Analysts at Bank of America warned in a note Friday that “there is a high degree of uncertainty about the speed and extent of the damage to the U.S. economy.” The underlying challenge is that if the government lacks the ability to issue debt, it will have to balance the books on a daily basis. If the government can’t issue debt, it will have to cut annual cuts equivalent to 5% of the US economy. But analysts said their base case was for the U.S. to avoid a default.
Still, if past debt-ceiling showdowns, such as the one that took place in 2011, are any guide, Washington may be in a state of suspended animation with little to do until the “X date” (the deadline by which extraordinary measures are exhausted). progress. This presents its own set of challenges.
“A deal may not be reached until the last minute, raising the risk of inadvertently missing the deadline to remove the cap,” said Andrew Hunter, senior U.S. economist at Capital Economics.
