With less than two weeks to go to avert a catastrophic default on the nation’s debt, the White House and House Speaker Kevin McCarthy have yet to reach an agreement to raise the debt ceiling.
President Joe Biden has indicated he doesn’t want to acquiesce to certain spending cuts, while congressional leaders like McCarthy object to tax-based solutions. Meanwhile, Janet Yellen, secretary of the U.S. Department of the Treasury, reiterated in a letter on Monday that waiting until the last minute “can cause serious harm.”
The looming deadline is known as “X-date,” or the estimate time at which government can no longer pay its bills. The Washington Post reported on Tuesday that the Treasury has asked government agencies if they can postpone upcoming payments to a later date.
In January, the U.S. government ran up against its legal borrowing limit of $31.381 trillion, and the Treasury Department began implementing “extraordinary measures” to avoid missing payments on its bills.
That started speculation about the “X-date” — the date when those measures would be exhausted and the government might actually default if the limit on federal borrowing is not lifted. The x-date could be reached as early as June, depending on how much money the IRS collects in April from people filing their taxes.
It seems ominous, right?
This might be the time to be getting a bit worried as more than three months have passed with little progress. There is only so long these accounting workarounds can last before President Joe Biden and House Speaker Kevin McCarthy need to reach a deal to lift the debt cap.
McCarthy is calling for trillions of dollars in spending cuts over the decade in return for an increase, while Biden insists that any talks about government finances should not occur with the threat of an economy-wrecking default hanging over lawmakers.
The Democratic president and Republican congressional leader have each tried to assure the public in recent weeks that they don’t want the government of the world’s largest economy to default. But Biden has resisted McCarthy’s calls for negotiations, while McCarthy is pushing a plan that can’t pass the Democratic-majority Senate.
These talks often grow heated and go down to the wire, with major economic damage in the balance. But there have been roughly 80 deals to raise or suspend the borrowing cap since the 1960s. What possibly makes this time different is the degree of political polarization, which could possibly lead to the U.S. government missing payments and triggering a global economic meltdown.
What are ‘Extraordinary Measures’?
To keep the government open, the Treasury Department in January began a series of accounting maneuvers that would put a hold on contributions and investment redemptions for government workers’ retirement and health care funds, giving the government enough financial space to handle its day-to-day expenses until June.
By suspending payments, the government can reduce the amount of outstanding debt, enabling the Treasury to keep financing government operations.
What happens if these “extraordinary measures” are exhausted without a debt limit deal is unknown. A prolonged default could be devastating, with crashing markets and panic-driven layoffs if confidence evaporated in a cornerstone of the global economy, the U.S. Treasury notes.
“Treasury Secretaries in every Administration over recent decades have used these extraordinary measures when necessary,” Yellen wrote in her initial letter about the measures.
The measures were first deployed in 1985 and have been used at least 16 times since then, according to the Committee for a Responsible Federal Budget, a fiscal watchdog.
The National Active and Retired Federal Employees Association cautioned that a failure to raise the debt limit could stop and delay payment of federal employees’ salaries and retirement benefits.
“If the Treasury Department exhausts both its borrowing authority and cash on hand, outgoing government payments must be limited to incoming revenue,” according to the Bipartisan Policy Center, a nonprofit think tank.
Why even have a debt limit?
Before World War I, Congress needed to approve each bond issuance. The debt limit was created as a workaround to finance the war effort without needing a constant series of votes.
Since then, a tool created to make it easier for the government to function has become a source of dysfunction, stoking partisan warfare and creating economic risk as the debt has increased in size over the past 20 years.
It’s unclear how Biden, McCarthy and the Democratic Senate will find common ground. A default could cause millions of job losses, a deep recession that would reverberate globally and, ironically, higher interest rates that would make it harder to manage the federal debt.
With reporting by Federal Times’ Molly Weisner and Reuters.