The Looming Risk of Default: United States Faces Impending Debt Ceiling Crisis
The United States is facing a looming risk of default on its debt obligations, with negotiations over raising the debt ceiling at a standstill.[0] The Congressional Budget Office (CBO) has warned that if the debt limit remains unchanged, the government may no longer be able to pay all of its obligations by the first two weeks of June.[1] The Treasury will be uncertain about its ability to fund the government's ongoing operations throughout May, even if it ultimately runs out of funds in early June, due to the timing and amount of revenue collections and outlays differing from CBO's projections. Economists have warned that a government default could produce devastating effects for the nation's economy, as well as global financial markets, with the broadest economic impact being a recession that would encompass the global economy, including sharp job losses.[2]
The CBO adjusted its projection for the federal deficit this year to $1.5 trillion, up $0.1 trillion from its February estimate. The CBO also released updated budget projections for 2023 and beyond, estimating that over the period of 2024-33, the deficit will total $20.2 trillion, little changed from the February estimate.[3] Before accounting for significant updates to tax revenue projections, the CBO says this year's deficit is expected to rise to $1.54 trillion, $130 billion higher than previously forecast, up from $1.38 trillion in fiscal 2022.
The debt limit, commonly referred to as the debt ceiling, is the maximum amount of debt that the Department of the Treasury can issue to the public or to other federal agencies.[4] Lawmakers increased the total debt limit to $31.4 trillion on December 16, 2021, by raising it by $2.5 trillion.[5] On January 19, 2023, that limit was reached, and the Treasury announced a “debt issuance suspension period” and began using “extraordinary measures” to borrow additional funds without breaching the debt ceiling.[5] However, the country's current debt limit of $31.4 trillion was reached on Jan. 19, 2023, and if the limit is not raised, “there is a significant risk that the Treasury will run out of funds at some point in the first two weeks of June.”
The political impasse continues as negotiations between President Joe Biden and Republican lawmakers remain deadlocked. The Republicans have insisted on combining a hike in the debt ceiling with budget reductions, a proposition that Democrats and President Biden have resisted. Given the 2024 election cycle, political parties are showing reluctance in resolving the impasse, with both sides at odds over a potential solution.[6] The GOP members are advocating for additional spending cuts to be included in the bill that seeks to raise the debt ceiling. However, the Biden administration is against this proposal and instead prefers to address the issue by reducing unnecessary spending on special interests and ensuring equitable tax contributions from the affluent.
Treasury Secretary Janet Yellen has warned that a default could occur as early as June 1, with estimates from economists indicating that the economic impact of a US debt default would be catastrophic, with massive job losses that would push the national unemployment rate to more than 8%, a meltdown on Wall Street that would send 401(k) and stocks and bonds crashing, the shuttering of many businesses and the plummeting of demand for agricultural and manufacturing exports produced in the state, as well as across the nation.[1]
Raising the debt ceiling was a regular occurrence in Congress until recently.[7] Since 1960, Congress has made 78 interventions to alter it in some manner.[7] However, it has become a political battle because it is one of the few must-pass bills, so lately Republicans have seen it as an opportunity to make demands.[7] The Biden administration has made a commitment to keep government funding separate and has declined any negotiations.[8] While former President Donald Trump has called on Republicans to allow the country to default if Democrats do not cave to their demands, Yellen has warned that a default could impair the country's credit rating and lead to a disastrous economic outcome.
0. “Here's how we know a US default would be an economic disaster” CNN, 11 May. 2023, https://www.cnn.com/2023/05/11/economy/debt-ceiling-trump-fact-check/index.html
1. “Debt ceiling: CBO confirms US could default as soon as early June” Business Insider, 12 May. 2023, https://www.businessinsider.com/cbo-confirms-us-could-default-debt-ceiling-early-june-2023-5
2. “Risk of debt default and its hit on jobs, economy nears as GOP, White House play game of political chicken” MinnPost, 9 May. 2023, https://www.minnpost.com/economy/2023/05/risk-of-debt-default-and-its-hit-on-jobs-economy-nears-as-gop-white-house-play-game-of-political-chicken/
3. “CBO sees ‘significant risk' of debt limit breach before June 15” Roll Call , 12 May. 2023, https://www.rollcall.com/2023/05/12/cbo-sees-significant-risk-of-debt-limit-breach-before-june-15/
4. “Financial news: $TSLA stock, Elon Musk, Twitter CEO, inflation, debt ceiling” AS USA, 13 May. 2023, https://en.as.com/latest_news/april-import-price-index-and-financial-news-inflation-debt-ceiling-social-security-check-jobless-claims-n/
5. “Federal Debt and the Statutory Limit, May 2023” Congressional Budget Office, 12 May. 2023, https://www.cbo.gov/publication/59130
6. “Debt Ceiling Deadlock Risks Default in June: Here's How The CBO Says Government Can Keep Operations Going …” Benzinga, 12 May. 2023, https://www.benzinga.com/government/23/05/32370529/debt-ceiling-deadlock-risks-default-in-june-heres-how-the-cbo-says-government-can-keep-operations-go
7. “When is the debt limit deadline? Early June, CBO says. Unless it's not.” The Washington Post, 12 May. 2023, https://www.washingtonpost.com/business/2023/05/12/debt-ceiling-deadline
8. “Here's who misses checks if the U.S. hits the debt brink in June” POLITICO, 9 May. 2023, https://www.politico.com/news/2023/05/09/debt-limit-white-house-00095867
