America Hit Its Debt Limit, Raising Economic Fears
"The Treasury Department said it would begin a series of accounting moves to keep the United States from breaching its borrowing cap.
WASHINGTON — The United States hit its debt limit on Thursday, prompting the Treasury Department to begin using a series of accounting maneuvers to ensure the federal government can keep paying its bills.
In a letter to Congress, Treasury Secretary Janet L. Yellen said the government would begin using what’s known as “extraordinary measures” to prevent the nation from breaching its statutory debt limit and asked lawmakers to raise or suspend the cap so that the government can continue meeting its financial obligations.
“The period of time that extraordinary measures may last is subject to considerable uncertainty, including the challenges of forecasting the payments and receipts of the U.S. government months into the future,” Ms. Yellen said. “I respectfully urge Congress to act promptly to protect the full faith and credit of the United States.”
The milestone of hitting the country’s $31.4 trillion debt cap is the product of decades of tax cuts and increased government spending by both Republicans and Democrats. But at a moment of heightened partisanship and divided government, it is also a warning of the entrenched partisan battles that are set to dominate Washington in the months to come, and that could end in economic shock.
Newly empowered Republicans in the House have vowed that they will not raise the borrowing limit again unless President Biden agrees to steep cuts in federal spending. Mr. Biden has said he will not negotiate conditions for a debt-limit increase, arguing that lawmakers should lift the cap with no strings attached to cover spending that previous Congresses authorized.
Treasury officials estimate the measures that they began using on Thursday will enable the government to keep paying federal workers, Medicare providers, investors who hold U.S. debt and other recipients of federal dollars at least until early June.
But economists warn that the nation risks a financial crisis and other immediate economic pain if lawmakers do not raise the limit before the Treasury Department exhausts its ability to buy more time.
The episode has prompted fears in part because of the lessons both parties have taken from more than a decade of debt-limit fights. A bout of brinkmanship in 2011 between House Republicans and President Barack Obama nearly ended in the United States defaulting on its debt before Mr. Obama agreed to a set of capson future spending increases in exchange for lifting the limit.
Most Democrats have solidified in their position that negotiations over the debt limit only enhance the risks of economic calamity by encouraging Republicans to use it as leverage. That is particularly true of Mr. Biden, who successfully stared down Republicans and won an increase in 2021 with no stipulations.
Newly elected Republicans, emboldened by anger among their base and conservative advocacy groups over failures in the past to exact concessions for raising the limit, have pledged not to let that happen again.
In reality, both parties have approved policies that fueled the growth in government borrowing. Republicans repeatedly passed tax cuts when they controlled the White House over the last 20 years. Democrats have expanded spending programs that have often not been fully offset by tax increases. Both parties have voted for large economic aid packages to help people and businesses endure the 2008 financial crisis and the 2020 pandemic recession.
Federal spending declined from its pandemic high in 2022, reaching nearly $6 trillion in the fiscal year, or just under 24 percent of the economy. The federal budget deficit, which is the shortfall between what the United States spends and what it takes in through taxes and other revenue, topped $1 trillion for the year. That is a decline from the past two years as emergency pandemic spending expired, though the Biden administration predicts the deficit will rise again in the current fiscal year.
Understand the U.S. Debt Ceiling
Many House Republicans call current spending levels and the debt load a threat to economic growth. They have not yet released formal demands for raising the debt limit, but have pushed to tie it to large spending reductions and passage of a budget that balances over the course of a decade.
“There will be Republicans who will say we need to reform,” Representative Chris Stewart, Republican of Utah, told CBS’s “Face the Nation” on Sunday. “We need to use this as a vehicle to try to put some limits on our spending, on our debt and our deficits.”
White House officials say it is inappropriate to attach any conditions to raising the limit. They also say Republicans are not serious about reducing deficits, pointing to the first bill the new House took up this month. That legislation would cut new funding for the Internal Revenue Service to crack down on wealthy tax cheats, which the nonpartisan Congressional Budget Office estimated would generate $180 billion over 10 years. The bill to repeal that funding would add more than $100 billion in additional budget deficits over the next decade, according to the office’s estimates.
“They’re threatening to kill millions of jobs and 401(k) plans by trying to hold the debt limit hostage unless they can cut Social Security, cut Medicare, cut Medicaid,” Karine Jean-Pierre, the White House press secretary, told reporters on Wednesday.
Congress still has a few months to find a way to raise the limit. The Treasury is expected to continue employing its so-called extraordinary measures for as long as possible. But the economic toll could begin to mount the closer the country gets to running out of cash, which could result in the United States being unable to pay its bondholders and defaulting on its debt. In 2011, as the standoff escalated, investors grew jittery, driving up borrowing costs for businesses and home buyers.
On Thursday, Ms. Yellen began what is likely to be a monthslong process of using the extraordinary measures to delay a default. In her letter, Ms. Yellen said that she is initiating a “debt issuance suspension period” that will last through June 5 and that Treasury will no longer be fully investing the portion of the Civil Service Retirement and Disability Fund that is not immediately required to pay beneficiaries. Treasury investments in the Postal Service Retiree Health Benefits Fund are also being suspended.
Ms. Yellen will most likely have to take additional steps if the stalemate drags on. Determining the actual “X-date,” when the United States will not be able to pay all of its bills on time, is difficult because it depends on how fast tax receipts are coming in and the performance of the economy.
The nature of the coming fight is just starting to take shape. House Republicans have been calling for sweeping “fiscal reforms.” And while Democrats would like to see a debt-ceiling increase with no demands attached, some have suggested that they are prepared to look for ways to reduce spending.
Senator Joe Manchin III, a moderate Democrat from West Virginia, said in an interview with the Fox Business Network on Wednesday that he believed that Congress should revive the 2010 Bowles-Simpson deficit reduction plan and combine and tie a debt-limit increase to some of those ideas. Although he mentioned looking for bipartisan ways to trim wasteful spending, Mr. Manchin did not appear prepared to back any cuts to the nation’s social safety net programs.
“We’re not getting rid of anything, and you can’t scare the bejesus out of people saying we’re going to get rid of Social Security, we’re going to privatize — that’s not going to happen,” Mr. Manchin said from the World Economic Forum in Davos, Switzerland.
The cost of not raising the borrowing cap could be catastrophic, causing a deep recession in the United States and potentially prompting a global financial crisis.
Gregory Daco, the chief economist at EY Parthenon, estimated this week that without an increase or suspension in the debt ceiling by the time extraordinary measures were exhausted, economic output in the United States could be cut by 5 percent. Such a contraction would deal a major blow to an economy that is projected to grow modestly this year.
“Treasury would need to balance the federal budget by ensuring that government outlays are equal to government revenues,” Mr. Daco said, predicting that such a scenario would lead to “a self-inflicted recession” and risk “severe financial market dislocations.”
Ms. Yellen has dismissed ideas for lifting the borrowing cap unilaterally, such as minting a $1 trillion coin, as fanciful.
Some veterans of debt-limit fights anticipate that as the X-date approaches, a sufficient number of Republicans will back away from the brink of a default.
“While no one really knows what would happen if you breach the debt limit, not many people would speculate that good stuff happens after that,” said Christopher Campbell, who served as assistant Treasury secretary for financial institutions from 2017 to 2018. “It’s a cascade of how bad it gets.”
Mr. Campbell, a former staff director for Senate Finance Committee Republicans, added, “At the end of the day, I think that cooler heads will have to prevail.”
White House officials, though, have privately begun exploring alternative routes to raising the limit, including maneuvers — which could take months — to force a vote on a debt-ceiling increase with predominantly Democratic support. They have not expressed confidence that Republicans will bend in negotiations, though they have repeatedly said they expect Congress to lift the limit.
Ms. Jean-Pierre reiterated on Wednesday that Mr. Biden would not negotiate over a debt-limit increase. Asked if she believed Republicans saw it as their responsibility to raise the limit and avoid a default, she replied, “They should.”