WASHINGTON — California Rep. Kevin McCarthy finally secured the speakership of the House of Representatives in a dramatic late-night vote early Saturday, but the deal he struck to win over Republicans also increased the risk of a lingering political streak standstill that could destabilize America’s financial system.
Economists, Wall Street analysts and political observers warn that the concessions he has made to fiscal conservatives could make it very difficult for Mr McCarthy to rally votes for a debt ceiling hike. That could prevent Congress from doing the basic jobs of keeping government running, paying the country’s bills, and avoiding default on America’s trillions of dollars in debt.
The battle for the speakership and the turbulent majority in the House of Representatives suggest that later this year President Biden and Congress could be on track to have the most dangerous debt ceiling debate since 2011, when former President Barack Obama and a new Republican majority in the House of Representatives earlier nearly defaulted on the nation’s debt to strike an 11-hour deal.
“If all we’re seeing is a symptom of a totally fragmented Republican House conference that won’t be able to get 218 votes together on virtually every issue, it’s telling you that the odds, the eleventh hour or the last minute are high or whatever is very high,” Alec Phillips, chief economist at Goldman Sachs Research, said in an interview on Friday.
The federal government spends far more money than it takes in revenue each year, resulting in a budget deficit that is projected to average over $1 trillion a year over the next decade. These deficits will contribute to a national debt that topped $31 trillion last year.
Federal law limits how much the government can borrow. But it doesn’t require the government to balance its budget. This means that lawmakers must regularly pass legislation to increase the borrowing limit to avoid a situation where the government is unable to pay all of its bills, causing payments including military salaries, Social Security benefits and debts to holders government bonds are at risk. Goldman Sachs researchers estimate that Congress will likely need to raise the debt limit sometime in August to stave off such a scenario.
Understand the US debt ceiling
Map 1 of 4
What is the debt ceiling? The debt ceiling, also known as the debt limit, is a cap on the total amount of money the federal government can borrow through U.S. Treasury securities, such as bills and savings bonds, to meet its financial obligations. Because the US runs budget deficits, it has to borrow huge sums of money to pay its bills.
Why is there a limit on borrowing in the US? Under the Constitution, Congress must approve borrowing. The debt limit was introduced in the early 20th century so that the Treasury didn’t have to ask for permission every time it had to issue debt to pay bills.
What would happen if the debt limit was reached? Exceeding the debt ceiling would result in a first-ever default by the United States and wreak havoc on the global economy. It would also force American officials to choose between continuing assistance like Social Security checks or paying interest on the country’s debt.
Raising the limit was once routine but has become increasingly difficult in recent decades as Republicans use the cap as a bludgeon to force spending cuts. Your leverage comes from the potential damage to the economy if the limit is not increased. Removing the debt ceiling does not justify new spending; it only allows the United States to fund existing commitments. Unless this cap is lifted, the government would be unable to pay all of its bills, including military salaries and Social Security payments.
The exception to the debt limit drama was the four years of Donald J. Trump’s presidency, when Republicans largely abandoned their push to tie the limit increase to federal spending cuts. In 2021, Senate Republicans clashed with Mr. Biden as the deadline for raising the cap neared, but those lawmakers ultimately helped Democrats pass legislation to raise the cap.
Some Democrats urged avoiding that scenario last year when it became clear their party was likely to lose at least one chamber of Congress. They hoped to raise the limit again in the lame duck session of Congress after the November election that handed control of the House of Representatives to Republicans to avoid any possibility of a default before the 2024 presidential election. But the effort never gained momentum.
As a result, the next round of debt ceilings could be the tightest ever – as the speakership battle shows. Conservative Republicans have already made it clear that they would not pass a debt ceiling hike without significant spending cuts, likely including cuts in both military and non-defense domestic spending.
Their power stems from the fact that Republicans have a narrower majority than they did after the 2010 midterms, which bolstered the conservative holdouts opposed to McCarthy. Demands from this group included sharp cuts in federal spending and balancing the federal budget within a decade without tax increases.
Mr. McCarthy appeared to agree with those demands, promising not to raise the debt limit without major spending cuts — including efforts to reduce spending on so-called mandatory programs, which include Social Security and Medicare — in a deal that drew many opposition camps.
A speaker who broke that deal could risk being overthrown by the Republican faction in the House of Representatives. But Mr. Biden and his party’s leaders in the Democratic-controlled Senate have vowed to fight those cuts — particularly to social safety-net programs. That could mean a prolonged standoff that lasts long enough for the government to run out of money to pay its bills.
Steadfast household hawks in Washington have long argued that the United States must stop spending – and borrowing – so much money and that this nation cannot pay its long-term debt. They have pushed for a variety of ways to slow growth in long-term spending, including cuts in health care for the poor and for older Americans. And many have called for ending some tax breaks while ensuring the richest and corporations pay more.
Yet most of these fiscal hawks have labeled Republican spending calls as reckless and likely standoffs on key fiscal issues.
“Their specific requirement to balance the budget in 10 years is just completely unrealistic. It would require $11 trillion in savings,” said Maya MacGuineas, president of Washington’s Federal Budget Committee, which has long urged lawmakers to reduce future deficits through spending cuts and tax increases.
“I want to save more money than a lot of people,” said Ms. MacGuineas. “But what they are asking for is just not achievable.”
Rushing towards a deadline for raising the debt limit would sow chaos in financial markets, including for equities and government bonds, Mr Phillips said. If Congress didn’t raise the debt ceiling and the government were unable to borrow more money, Phillips said, America would suffer a sudden drop in federal spending equivalent to a tenth of all daily economic activity.
“It doesn’t feel like a false alarm,” he said.
In 2011, Republicans and Mr. Obama reached an agreement to raise the debt ceiling, which also imposed future limits on domestic spending increases. Ms MacGuineas, Mr Phillips and other analysts have expressed skepticism that negotiations between Mr Biden and House Republicans would do the same thing this time, partly because the faction that blocked Mr McCarthy’s rise this week appears unwilling to compromise for much more modest concessions to be made by Democrats.
Administration officials have given no indication that they would even negotiate with Republicans on raising the debt limit — or that they are preparing for the possibility that a House speaker refuses to put a debt limit increase to a vote without drastic spending cuts.
Karine Jean-Pierre, the White House press secretary, told reporters in a briefing on Friday that Mr. Biden expects Congress to raise the debt limit again, with no strings attached.
“We have said that we should not use the debt ceiling as a political risk,” she said. “We were very clear. If you look at what Congressional Republicans did three times — three times during the Trump administration — they could handle it responsibly, right? They voted three more times to remove the debt ceiling. And so, once again, Congress must be held accountable.”
Moderate lawmakers have already begun to outline ways the House could raise the limit. A futile idea: a so-called relief motion signed by a majority in the House of Representatives to force a vote on a bill. Such a move would presumably rest almost entirely on Democratic votes, with some Republicans joining. But this result is far from guaranteed; it would require extensive coordination from both sides and expose defecting Republicans to punishment and primary challenges.
Still, Pennsylvania Republican Rep. Brian Fitzpatrick hailed the possibility of such a compromise in an interview with CNN this week. “There are a number of ways to get around the lead,” he said. “There’s not a ton. But there are options available to us.”
Comments are closed.