President Joe Biden has requested a meeting with congressional leaders to discuss the debt ceiling, as the U.S. government may default on its financial obligations by June 1.
The Treasury Department’s new projection indicates that the government could run out of cash to pay its bills in as little as four weeks without additional borrowing authority, which could have dire consequences for the fragile U.S. economy and world financial markets.
The debt ceiling sets a legal limit on how much the U.S. government can borrow, currently at $31 trillion.
Since the national debt hit the cap in January, the Biden administration has implemented special budgetary measures to conserve cash and buy time for lawmakers to either raise the limit or suspend its enforcement.
Republican Lawmakers Attempt to Extract Spending Cuts and Policy Concessions
Republican lawmakers have used the looming deadline to extract spending cuts and other policy concessions from the White House.
Last week, the House approved a Republican measure that would briefly raise the debt ceiling while cutting billions of dollars in federal spending and repealing some of Biden’s recent legislative accomplishments.
Biden Refuses to Haggle over Debt Ceiling with Republicans
President Biden has called on Congress to raise the debt ceiling without conditions and has threatened to veto the Republican measure.
Until now, he had refused to negotiate over an issue that poses significant economic risks.
Treasury Department warns of an urgent need for action to avoid default
Meanwhile, the Treasury Department has sounded an urgent alarm about the need for haste, with Treasury Secretary Janet L. Yellen warning that the agency may be “unable to continue to satisfy all of the government’s obligations by early June, and potentially as early as June 1.”
Yellen cautioned that the projection is imprecise, given the variability of federal tax receipts, but emphasized the economic consequences of inaction, stating that it could cause “severe hardship to American families, harm our global leadership position, and raise questions about our ability to defend our national security interests.”
Failure to make payments could send shock waves through the global financial system
The potential default carries high political and economic stakes, as the nation has never defaulted on its financial obligations.
Failure to pay bondholders, federal employees, and beneficiaries of government programs such as Social Security could send shock waves through the entire global financial system.
Adding to the uncertainty, the federal government and private economists have offered mixed and conflicting estimates as to the actual debt ceiling deadline, known as the “x date.”
On Monday, the nonpartisan Congressional Budget Office reported that there is now a “significantly greater risk” that the United States could run out of funds in early June compared to its earlier projection that lawmakers had until September to act.
Republicans have previously raised the debt ceiling without demanding fiscal reforms
Republicans have previously raised the debt ceiling without issuing demands, addressing the borrowing cap under President Donald Trump three times without demanding fiscal reforms.
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Each time, Democrats serving in the minority also supplied their votes in a bid to avert a crisis.
With time running out, the flurry of activity reveals a growing sense of anxiety in Washington as the nation faces the possibility of defaulting on its financial obligations for the first time in its history.
House Republicans demand spending cuts and tax reforms as debt surpasses $50 trillion
Republican lawmakers have adopted a more aggressive stance under President Biden, using the threat of a fiscal crisis as a political tool and blaming Democrats for the burgeoning debt.
Both parties’ policies have contributed to a growing tide of red ink that could exceed $50 trillion over the next decade.
In response, House Republicans adopted the Limit, Save, Grow Act, which calls for billions of dollars in spending cuts, the repeal of federal funds to fight climate change, new work requirements for welfare recipients, and an end to Biden’s plan to cancel student debts.
The Act is seen as a tool meant to force Biden to negotiate.
Republicans blame Democrats for not negotiating
House Minority Leader Kevin McCarthy, in a news conference, blamed Democrats for not negotiating and for Biden’s inability to ignore their demands.
He stated, “The sad part here is, now the Democrats need to do their job.”
Biden open to discussing fiscal issues with GOP
Despite this, Biden has said he is open to discussing other fiscal issues with the House Speaker, but only if the GOP lays out its plan for balancing federal spending and tax revenue. The party has yet to tackle this difficult task.
During a recent discussion, Biden slammed the GOP’s Limit, Save, Grow Act, saying, “their extreme MAGA plan would cut critical funding for education, public safety, including cut 60,000 public schoolteachers, take health care and food assistance away from millions of working families.”
McCarthy criticizes Biden’s inaction
Meanwhile, House Minority Leader McCarthy, who is on an official trip to Israel, criticized Biden for his inaction and “threatening to bumble our nation into its first default.” He urged the Senate and the President to get to work and pass the Limit, Save, Grow Act.
“After three months of the Biden administration’s inaction, the House acted, and there is a bill sitting in the Senate as we speak that would put the risk of default to rest. The Senate and the President need to get to work — and soon,” McCarthy said in a statement.
Democrats skeptical of negotiations
Some Senate Democrats responded pessimistically to the idea of talks at the White House, arguing that Biden should continue refusing to negotiate.
“There’s no deal to cut here,” Sen. Brian Schatz (D-Hawaii) said Monday before news broke about the president’s invitation. “The premise here is that there should be no policy concessions in exchange for preventing default.”
Republicans unwilling to get involved
Some Senate Republicans appeared equally unenthusiastic about Biden’s outreach, reiterating their unwillingness to get involved in what they believe should be a negotiation solely between Biden and McCarthy.
“What we’ve said all along is the only thing that can get 60 votes in the Senate is something that’s negotiated between the president and the House Republican leadership,” said Sen. John Thune (R-S.D.), McConnell’s deputy. “And so I’m not sure at this point what Schumer or McConnell add to the debt conversation.”
Grim specter of 2011
The looming deadline and the lack of a path forward raised the grim specter of 2011 when Washington came within days of breaching the debt limit.
Then the standoff between Republican lawmakers and a Democratic president spooked the stock market and triggered a downgrade in the nation’s credit rating, ultimately costing taxpayers an estimated $1 billion in higher interest rates on government bonds.
Investors hedging against potential disruption.
This year, investors have already started to hedge against the potential for another disruption, shifting away from bonds that mature around the date of the debt ceiling deadline.
In another ominous sign, Fitch Ratings, which evaluates debt, warned last week that persistent dysfunction could result in another downgrade of the nation’s credit rating.
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