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America Set to Hit Its Borrowing Limit

Today, Raising Economic Fears
The milestone will not immediately affect markets or growth, but
it sets the stage for months of entrenched partisan warfare.

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The Treasury Department will use so-called extraordinary measures to allow the federal government to
keep paying its bills. Stefani Reynolds for The New York Times

By Jim Tankersley and Alan Rappeport

Jan. 19, 2023, 5:00 a.m. ET

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WASHINGTON — The United States is expected to hit a

congressionally imposed borrowing limit on Thursday, requiring
the Treasury Department to engage in accounting maneuvers to
ensure the federal government can keep paying its bills.

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 will begin

employing 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 caps on
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.

Treasury Secretary Janet L. Yellen has dismissed ideas for lifting the borrowing cap unilaterally, such as
minting a $1 trillion coin, as fanciful. Sarahbeth Maney/The New York Times

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

What is the debt ceiling? The debt ceiling, also called the debt limit , is a cap
on the total amount of money that the federal government is authorized to
borrow via U.S. Treasury securities, such as bills and savings bonds, to fulfill
its financial obligations. Because the United States runs budget deficits, it
must borrow huge sums of money to pay its bills.

Many House Republicans call current spending levels and the debt
load a threat to economic growth. They have not yet released
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formal demands for raising the debt limit, but have pushed to tie it
to large spending reductions and passage of a budget that balances
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“There will be Republicans who will say we need to reform,”
Representative Chris Stewart, Republican of Utah, told CBS’s
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“Face the Nation” on Sunday. “We need to use this as a vehicle to Houston
try to put some limits on our spending, on our debt and our
deficits.” I’m Racing My
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White House officials say it is inappropriate to attach any Boyfriend. Help!
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.

Treasury officials estimate the measures they will begin employing will enable the government to keep
paying federal workers. Justin Sullivan/Getty Images

On Thursday, Treasury Secretary Janet L. Yellen will begin what is

likely to be a monthslong process of using the extraordinary
measures to delay a default. The initial steps will include
suspending new investments in the Civil Service Retirement and
Disability Fund and the Postal Service Retiree Health Benefits
Fund, and suspending reinvestment of the Government Securities
Investment Fund of the Federal Employees Retirement System
Thrift Savings Plan.

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. For now, she has projected
that the government should be able to meet its obligations through
early June.

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-
impson 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.

Senator Joe Manchin III has mentioned looking for bipartisan ways to trim wasteful spending. Shuran
Huang for The New York Times

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-
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.”

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