The US government risks an unprecedented default as soon as July if the debt ceiling is not raised, the Congressional Budget Office has warned amid a growing war of words between the White House and congressional Republicans over lifting the borrowing limit.
The CBO, a non-partisan government agency that analyses fiscal policy for Congress, projected on Wednesday that if the debt ceiling, the legal limit on the government’s borrowing, is unchanged, the government’s “ability to borrow using extraordinary measures will be exhausted between July and September 2023”.
The exact timing for the cliff edge is dependent in part on income tax receipts due in April. The CBO noted that if these receipts fall short of current estimates, the Treasury could “run out of funds” before July.
Treasury secretary Janet Yellen told Congress in January that the department had begun taking “extraordinary measures” to meet its obligations after running up against the $31.4tn borrowing limit. Yellen has previously said it is “unlikely” the government will run out of money before “early June”, although independent economists have offered a range of estimates about when the US will run up against a possible default.
The CBO warned that if the debt limit is not raised or suspended, and the government is unable to pay its obligations in full, the Treasury would either need to delay making some payments, default on its debt obligations, or both.
The CBO forecasts are the latest warning to lawmakers over the risks of not raising the debt ceiling. The Biden White House has called on Congress to lift the borrowing limit without conditions, while Republican lawmakers have sought to tie raising the debt ceiling to sweeping budget cuts.
Each side has accused the other of acting irresponsibly, raising fears of a stalemate in a sharply divided Washington that could have wide-reaching repercussions for markets and investors. Lawmakers narrowly averted a default in 2011, but only after an S&P downgrade to the government’s creditworthiness and a market rollercoaster.
On Wednesday, President Joe Biden delivered a speech accusing the Republicans of pushing proposals that would add $3tn to the national debt over the next decade, and insisting that his forthcoming budget would cut the deficit by $2tn over the same period.
But Kevin McCarthy, the Republican Speaker of the House of Representatives who has come under pressure to lay out his own budget proposal, shot back, accusing Democrats of “reckless spending” that was “jeopardising our economy”.
“That’s why we must negotiate a responsible debt limit increase that gets our fiscal house back in order,” McCarthy added.
The CBO issued its warning alongside a report on the federal budget and economic outlook for the next decade. The watchdog projected that the federal budget deficit would total $1.4tn this year, with annual deficits averaging $2tn over the next decade.
The CBO said the “cumulative deficit” over the coming decade would be $3tn higher than previously forecast, in large part due to recent legislation and the rising cost of borrowing.
“Over the long term, our projections suggest that changes in fiscal policy must be made to address the rising costs of interest and mitigate other adverse consequences of high and rising debt,” said Phillip Swagel, the CBO director.
Source: Economy - ft.com
