The US government risks beginning to run out of money in a matter of weeks unless Republicans in Congress reach a compromise with President Joe Biden that would avoid economic Armageddon.
Janet Yellen, the treasury secretary, warned on Sunday that the US could hit its debt ceiling limit – the law that limits the total amount of money the government can borrow to pay its bills – as soon as 1 June.
Failure to extend the cap, which currently stands at around $31.4trn, would see the government unable to pay federal employees, the military, social security and Medicare, as well as interest on the national debt and tax refunds. The situation could spell “economic calamity” both domestically and around the world, Yellen said.
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What did the papers say?
“Usually it’s a formality for Congress to raise the limit as needed but this time it can’t seem to agree on the terms,” said the BBC’s business reporter in New York, Natalie Sherman.
Republicans, who have a slim majority in the House of Representatives, have so far refused to approve a “clean” debt limit bill unless it also cuts future federal spending, reported Reuters. They have proposed limited spending growth for key agencies to 1% annually over the next decade, while also repealing key priorities of the Biden administration, such as student loan forgiveness and tax incentives for electric vehicles.
Unsurprisingly, Democrats and the president have rejected the proposals and accused Republicans of playing a dangerous game of economic brinkmanship for political gain.
“Plenty of scenarios are being publicly and privately gamed out, but no one knows for sure,” said The Independent. “The possibilities range from kumbaya to economic chaos with plenty of possibilities in between.”
According to NPR’s political correspondent Mara Liasson, possible outcomes could see leaders “negotiate a deal and claim a political victory, or decide to kick the can down the road with a temporary debt ceiling increase, which would have to be negotiated later this year and could risk a government shutdown”. The other option is that “they could stay at an impasse and let the country default, with what economists say will be disastrous consequences”, she added.
It is a “precarious moment”, said The New York Times. If a solution is not found before the government runs out of cash, “what is known as the X-date”, millions of Americans may “stop receiving government benefits, stock markets could plunge, and a constitutional crisis could ensue”, said the paper.
“Given the split control of Congress, and the slim majorities in both chambers, some sort of bipartisan compromise is inevitable if default is to be avoided”, said The Washington Post.
“The right-wing zealots who control the House Republican Conference are never going to agree to raise the debt ceiling without deep spending cuts and the unwinding of other Biden-era initiatives – demands that even the most centrist Democrats are unlikely to accept,” the paper added. “At the same time, leaders of both parties know that default is a lose-lose proposition, given the economic havoc that would surely follow.”
“There’s a lot at stake,” agreed Liasson and at present there is “no ‘face-saving off-ramp’ in sight”.
What next?
With only eight days left this month during which both the House and the Senate are scheduled to be in session at the same time, “time is running out to reach a deal”, CNBC reported. That makes this a “critical week”, said BBC North America correspondent Anthony Zurcher.
Biden is to host House and Senate leaders from both parties at the White House on Tuesday, with the president and Republicans still a long way apart and with no sign of a compromise on either side.
The clash between President Biden and House majority leader Kevin McCarthy over the US debt “will decide who is the most dominant figure in Washington for most of the next two years”, said CNN. “And a failure by the two men to come to terms by this time next month would result in a national default that could have a profound impact on the economy and the 2024 election.”
While most economists and political commentators believe, at the very least, that lawmakers would agree a short extension before the debt ceiling is reached, the chance of a default remains “the scariest possibility”, said The Independent.
It would, said CNN, be “felt by millions of Americans in lost jobs, benefits and an eroded sense of economic security”. Ratings agency Moody’s Analytics predicted that in a prolonged stand-off, stock prices would fall by almost a fifth and the economy would contract more than 4%, leading to the loss of more than seven million jobs.
An intentional default would also “shock the financial system where more than $500bn in US debt gets traded every day”, said the BBC’s Sherman.
“It’s this very threat of catastrophe that makes the debt ceiling showdown such an effective tool of political leverage,” said CNN. “Both sides in the standoff appear to believe that the other will blink to avoid the appalling consequences of going over the edge of a cliff. But worryingly, each party seems convinced the other will cave to avoid blame.”
