U.S. Risks Fiscal Cliff in Fall Amid Partisanship on Debt
(Bloomberg) -- Risks of a major disruption in U.S. government spending and payments this fall escalated sharply on Monday as Democrats signaled they’d force Republicans into a showdown on the federal debt limit.
Senate Democrats decided against including an increase or suspension in the statutory debt ceiling in the text of a budget blueprint released Monday. The resolution provides for $3.5 trillion of spending that would enact the bulk of President Joe Biden’s economic agenda.
Republicans, opposing the ramp-up in social spending in that legislation, had called on Democrats to include the debt-limit hike in the package, which can pass with 50 votes in the Senate -- removing the need for any GOP support. The Biden administration weighed in on the question Monday, with Treasury Secretary Janet Yellen in a statement calling for the increase in the ceiling to be dealt with in a bipartisan bill.
“In recent years Congress has addressed the debt limit through regular order, with broad bipartisan support,” Yellen said, noting it had done so three times during the Trump administration. “Increasing or suspending the debt limit does not increase government spending, nor does it authorize spending for future budget proposals; it simply allows Treasury to pay for previously enacted expenditures.”
Senate Republican leader Mitch McConnell rejected Yellen’s call, saying that Democrats’ fiscal plans are “historically abnormal,” unlike past episodes of bipartisan action on the debt limit. He said on the Senate floor that Democrats should not expect traditional bipartisan borrowing to finance a “nontraditional” and reckless tax and spending spree.
“They deserve to have total ownership of that decision,” McConnell said.
Without a debt-limit increase, the government will run out of money to pay all of its bills soon after Congress returns from a recess in September. Lawmakers also face a Sept. 30 deadline to fund government operations after the end of the current fiscal year.
The federal government still has more than a month to go and by some estimates considerably longer before it begins defaulting on payments. But bond market participants warned last week that, under some scenarios, the Treasury beforehand may need to execute abrupt declines in issuance of bills -- a crucial component of financial markets.
Wall Street so far has shrugged off the risk, betting the deadlock will be resolved ahead of any disruption. But a default could delay payments to Treasury debt holders, Social Security recipients, veterans and other federal beneficiaries. It also could risk a downgrade of the U.S. credit rating, triggering turmoil in financial markets.
The legal debt limit for the U.S. Treasury snapped back into effect on Aug. 1, after a two-year suspension passed under President Donald Trump expired. Yellen has said the government could exhaust special measures and run out of cash “soon after Congress returns from recess” in September.
Others anticipate more time. The Congressional Budget Office forecasts lawmakers will have until October of November to raise or suspend the debt limit. Bank of America strategist Mark Cabana estimated in a note to clients that the Treasury won’t run out of money until mid- to late-November.
The debt increase will be needed regardless of whether Biden’s agenda is approved, in part because of the 2017 Republican tax cuts passed under Trump and a series of Covid relief measures passed under both Trump and Biden.
Despite moments of drama, the White House and Congress have always resolved deadlocks over the debt limit without a default. But a protracted and acrimonious fight in 2011 between President Barack Obama and congressional Republicans took the country to the brink, leading to the first first-ever downgrade of the U.S. sovereign credit rating and contributing to a stock-market slide.
The benchmark S&P 500 fell almost 17% in less than three weeks, a plunge that started as the debt impasse worsened but continued even after a default was averted. With concerns also rising over a sovereign debt crisis in Europe at the time, the index took more than six months to recover to its July 22, 2011, close.
Most GOP senators speaking on the matter have been adamant that they won’t support extending the debt limit in a short-term spending bill, known as a continuing resolution. Agencies will run out of spending authority when the fiscal year ends on Sept. 30, and absent so-far elusive consensus on appropriations bills the government would shut down without the must-pass stop-gap measure.
The budget blueprint is expected to be voted on this week in the Senate soon after final passage of a bipartisan $550 billion infrastructure package. It allows Democrats to bypass Republicans to expand the social safety net and address climate change, paid for by raising taxes on the wealthy and corporations.
©2021 Bloomberg L.P.