U.S. default could begin June 8 without agreement, top economist tells Congress
Unless Congress can strike a deal, the U.S. Treasury will likely default on the nation’s bills starting June 8, triggering major consequences for the economy, according to Mark Zandi of Moody’s Analytics.
The risk assessment organization’s chief economist testified before the U.S. Senate Committee on the Budget Thursday and urged lawmakers to suspend the debt ceiling as soon as possible, and to ensure it is addressed long enough to make it to the other side of the 2024 presidential election.
Congress has eight working days with both chambers in session before Memorial Day, and negotiations appear non-existent. On Monday, President Joe Biden called Senate and House leaders and scheduled a White House meeting for May 9. Biden and House Speaker Kevin McCarthy last met about the debt ceiling in early February.
“This is an especially inopportune time to have a political debate over the debt limit. Recession risks are uncomfortably high,” Zandi warned lawmakers.
“I’d say a majority of economists, many CEOs and investors firmly believe that a recession is likely over the next 12 to 18 months. The economy is struggling with the increase in interest rates. The (Federal) Reserve raised rates again yesterday, they’ve raised rates over 5 percentage points, all (in) over a year. That’s created tremendous pressure on the economy and of course on the banking system.”
Zandi, and other witnesses, did not dispute that the U.S. is on an “unsustainable” spending path, but they pressed lawmakers to disentangle long-term work on reducing the nation’s deficit from the immediate need to raise the debt limit.
The nonpartisan Congressional Budget Office, which is tasked with calculating costs and savings of federal legislation, projects a deficit of $1.4 trillion in 2023 and $2 trillion each year thereafter until 2033.
“We need both additional tax revenue and we need spending restraint. Both of those things need to happen, but we can’t do that in the current environment. So this is not the time to do it,” Zandi said. “We need to end this drama as quickly as possible. If we don’t, we’re going to go into recession and our fiscal challenges will be made even worse.”
Treasury Secretary Janet Yellen warned in a letter to lawmakers Monday that the country could meet its X-date, or default, as soon as June 1.
McCarthy, a California Republican, has vowed that his party will not raise the nation’s borrowing cap without simultaneous budget reductions.
Republicans pushed through a debt ceiling bill April 26 by a slim margin, 217-215, to temporarily raise the limit by $1.5 trillion or until March 31, 2024, whichever comes first.
They tied the measure to massive discretionary spending cuts and changes in federal programs, including dismantling new climate provisions passed in last year’s Inflation Reduction Act and increasing work requirements for recipients of government food and medical benefits.
The bill largely received support from the bipartisan fiscal watchdog the Committee for a Responsible Federal Budget — except for a provision to slash new Internal Revenue Service funding meant to increase tax revenue collection.
The CBO projected that the GOP’s bill — titled the Limit, Save, Grow Act — would reduce the federal deficit by a projected $4.8 trillion over the next decade.
Biden and Democrats have panned the bill, nicknaming it the Default on America Act, or DOA Act. They have pledged to refuse to negotiate on the legislation and liken it to taking the U.S. economy “hostage,” as Senate Majority Leader Chuck Schumer repeated on the Senate floor Thursday.
Senate Democrats subtitled their Thursday panel as a hearing about “Blackmail, Brinkmanship and Billionaire Backroom Deals.”
“MAGA Republicans’ dangerous bill proposes a terrible choice: Default on our financial obligations, cause widespread pain and wreck our economy. Or gut basic federal programs essential to our economic strength, cause widespread pain and wreck our economy,” said Budget Committee Chair Sheldon Whitehouse of Rhode Island.
Democrats highlighted a recent Moody’s analysis that projects the GOP bill — when compared to a standalone bill to raise the debt ceiling — would slow the nation’s Gross Domestic Product and cost the economy 780,000 jobs by the end of next year.
“(The Limit, Save, Grow Act) entails significant cuts to government spending beginning in fiscal year 2024, which begins at the end of this year, right at the point in time when the economy is going to be most vulnerable to going into recession. By my calculation, the act will shave spending equal to about a half a percent of GDP in 2024. And that’s a half a percent that the economy does not have,” Zandi told the panel.
Ranking member Chuck Grassley of Iowa maintained that House Republicans “have acted responsibly” in passing their bill to address the debt limit and spending together.
“In contrast, President Biden and Biden Senate Democrats have sat idly by watching the clock get down to default by not thoughtfully engaging. They hope to avoid a substantive debate on a very serious fiscal issue,” Grassley said Thursday.
Minority Leader Mitch McConnell has so far stayed on the sidelines of the debate, reiterating this week that there is “no solution in the Senate.”
“The only solution is for presidential leadership. President Biden has been sleepwalking towards this crisis,” the Kentucky Republican said on the floor Wednesday.
The White House meanwhile has been hammering the talking points this week that McCarthy’s deal will threaten health care for 21 million Americans, potentially cut veterans’ benefits and pull 2,000 Customs and Border Patrol agents off the job.
“This President has not backed away. The problem is who you value in this country. Is it a special interest, or do you want to save (money) on the backs of people who can least afford it?” said Shalanda Young, director of the Office of Management and Budget, at the White House press briefing Thursday.
Finding a new path
Witnesses testifying before Thursday’s Senate panel also called for Congress to find an altogether new path for fiscal negotiations rather than repeating down-to-the-wire politically fraught fights each time the U.S. edges toward a fiscal cliff.
“It is critically important for the U.S. to avoid future debt ceiling brinkmanship,” said Jason Fichtner, the Bipartisan Policy Center’s vice president and chief economist.
The organization suggests a framework going forward to align the debt limit with the annual budget process along with an off-ramp to trigger a debt ceiling suspension if the U.S. comes within 60 days of reaching its statutory borrowing limit.
Congress has approved 102 separate adjustments to the debt ceiling since the end of World War II.
The body raised the debt ceiling three times under the Trump administration. Under Biden in December 2021, Congress increased the debt limit by $2.5 trillion to $31.38 trillion.
The U.S. hit its borrowing limit on Jan. 19, triggering the Treasury Department to invoke “extraordinary measures,” or special accounting maneuvers, to continue paying the nation’s bills.
Adding to its budgeting maneuvers, the Treasury has begun suspending the issuance of State and Local Government Series securities — special securities offered to state and local governments that count against the debt ceiling. The maneuver was also used in the 2014 and 2015 debt ceiling debates as a way to delay the U.S. from reaching its borrowing limit.