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Why the Debt Limit Spending Cuts Likely Won’t Shake the Economy

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With low unemployment and above-trend inflation, the economy is well positioned to absorb the modest budget cuts that President Biden and Republicans negotiated.The last time the United States came perilously close to defaulting on its debt, a Democratic president and a Republican speaker of the House cut a deal to raise the nation’s borrowing limit and tightly restrain some federal spending growth for years to come. The deal averted default, but it hindered what was already a slow recovery from the Great Recession.The debt deal that President Biden and Speaker Kevin McCarthy have agreed to in principle is less restrictive than the one President Barack Obama and Speaker John Boehner cut in 2011, centered on just two years of cuts and caps in spending. The economy that will absorb those cuts is in much better shape. As a result, economists say the agreement is unlikely to inflict the sort of lasting damage to the recovery that was caused by the 2011 debt ceiling deal — and, paradoxically, the newfound spending restraint might even help it.“For months, I had worried about a major economic fallout from the negotiations, but the macro impact appears to be negligible at best,” said Ben Harris, a former deputy Treasury secretary for economic policy who left his post earlier this year.“The most important impact is the stability that comes with having a deal,” Mr. Harris said. “Markets can function knowing that we don’t have a cataclysmic debt ceiling crisis looming.”Mr. Biden expressed confidence earlier this month that any deal would not spark an economic downturn. That was in part because growth persisted over the past two years even as pandemic aid spending expired and total federal spending fell from elevated Covid levels, helping to reduce the annual deficit by $1.7 trillion last year.Asked at a news conference at the Group of 7 summit in Japan this month if spending cuts in a budget deal would cause a recession, Mr. Biden replied: “I know they won’t. I know they won’t. Matter of fact, the fact that we were able to cut government spending by $1.7 trillion, that didn’t cause a recession. That caused growth.”The agreement in principle still must pass the House and Senate, where it is facing opposition from the most liberal and conservative members of Congress. It goes well beyond spending limits, also including new work requirements for food stamps and other government aid and an effort to speed permitting for some energy projects. But its centerpiece is limits on spending. Negotiators agreed to slight cuts to discretionary spending — outside of defense and veterans’ care — from this year to next, after factoring in some accounting adjustments. Military and veterans’ spending would increase this year to the amount requested in Mr. Biden’s budget for the 2024 fiscal year. All those programs would grow by 1 percent in the 2025 fiscal year — which is less than they were projected to.A New York Times analysis of the proposal suggests it would reduce federal spending by about $55 billion next year, compared with Congressional Budget Office forecasts, and by another $81 billion in 2025.The first back-of-the-envelope analysis of the deal’s economic impacts came from Mark Zandi, a Moody’s Analytics economist. He had previously estimated that a prolonged default could kill seven million jobs in the U.S. economy — and that a deep round of proposed Republican spending cuts would kill 2.6 million jobs.His analysis of the emerging deal was far more modest: The economy would have 120,000 fewer jobs by the end of 2024 than it would without a deal, he estimates, and the unemployment rate would be about 0.1 percent higher.President Biden expressed confidence that any deal would not spark an economic downturn.Doug Mills/The New York TimesMr. Zandi wrote on Twitter on Friday that it was “Not the greatest timing for fiscal restraint as the economy is fragile and recession risks are high.” But, he said, “it is manageable.”Other economists say the economy could actually use a mild dose of fiscal austerity right now. That is because the biggest economic problem is persistent inflation, which is being driven in part by strong consumer spending. Removing some federal spending from the economy could aid the Federal Reserve, which has been trying to get price growth under control by raising interest rates.“From a macroeconomic perspective, this deal is a small help,” said Jason Furman, a Harvard economist who was a deputy director of Mr. Obama’s National Economic Council in 2011. “The economy still needs cooling off, and this takes pressure off interest rates in accomplishing that cooling off.”“I think the Fed will welcome the help,” he said.Economists generally consider increased government spending — if it is not offset by increased tax revenues — to be a short-term boost for the economy. That’s because the government is borrowing money to pay salaries, buy equipment, cover health care and provide other services that ultimately support consumer spending and economic growth. That can particularly help lift the economy at times when consumer demand is low, such as the immediate aftermath of a recession.That was the case in 2011, when Republicans took control of the House and forced a showdown with Mr. Obama on raising the borrowing limit. The nation was slowly climbing out of the hole created by the 2008 financial crisis. The unemployment rate was 9 percent. The Federal Reserve had cut interest rates to near zero to try to stimulate growth, but many liberal economists were calling for the federal government to spend more to help bolster demand and accelerate job growth.The budget deal between Republicans and Mr. Obama — which was hammered out by Mr. Biden, who was then the vice president — did the opposite. It reduced federal discretionary spending by 4 percent in the first year after the deal compared with baseline projections. In the second year, it reduced spending by 5.5 percent compared with forecasts.Many economists have since blamed those cuts, along with too little stimulus spending at the recession’s outset, for prolonging the pain.The deal announced on Saturday contains smaller cuts. But the even bigger difference today is economic conditions. The unemployment rate is 3.4 percent. Prices are growing by more than 4 percent a year, well above the Fed’s target rate of 2 percent. Fed officials are trying to cool economic activity by making it more expensive to borrow money.Michael Feroli, a JPMorgan Chase analyst, wrote this week that the right way to assess the emerging deal was in terms of “how much less work the Fed needs to do in restraining aggregate demand because fiscal belt-tightening is now doing that job.” Mr. Feroli estimated the agreement could function as the equivalent of a quarter-point increase in interest rates, in terms of helping to restrain inflation.While the deal will only modestly affect the nation’s future deficit levels, Republicans have argued that it will help the economy by reducing the accumulation of debt. “We’re trying to bend the cost curve of the government for the American people,” Representative Patrick T. McHenry of North Carolina, one of the Republican negotiators, said this week.Still, the spending reductions from the deal will affect nondefense discretionary programs, like Head Start preschool, and the people they serve. New work requirements could choke off food and other assistance to vulnerable Americans.Many progressive Democrats warned this week that those effects will amount to their own sort of economic damage.“After inflation eats its share, flat funding will result in fewer households accessing rental assistance, fewer kids in Head Start and fewer services for seniors,” said Lindsay Owens, the executive director of the liberal Groundwork Collaborative in Washington.Catie Edmondson More

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    Yellen’s Debt Limit Warnings Went Unheeded, Leaving Her to Face Fallout

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    The Treasury secretary, who considered ways to contain the fallout of a default when she was a Fed official in 2011, had urged Democrats to raise the limit while they still had control of Congress.In the days after November’s midterm elections, Treasury Secretary Janet L. Yellen was feeling upbeat about the fact that Democrats had performed better than expected and maintained control of the Senate.But as she traveled to the Group of 20 leaders summit in Indonesia that month, she said Republicans taking control of the House posed a new threat to the U.S. economy.“I always worry about the debt ceiling,” Ms. Yellen told The New York Times in an interview on her flight from New Delhi to Bali, Indonesia, in which she urged Democrats to use their remaining time in control of Washington to lift the debt limit beyond the 2024 elections. “Any way that Congress can find to get it done, I’m all for.”Democrats did not heed Ms. Yellen’s advice. Instead, the United States has spent most of this year inching toward the brink of default as Republicans refused to raise or suspend the nation’s $31.4 trillion borrowing limit without capping spending and rolling back parts of President Biden’s agenda.Now the federal government’s cash balance has fallen below $40 billion. And on Friday, Ms. Yellen told lawmakers that the X-date — the point at which the Treasury Department runs out of enough money to pay all its bills on time — will arrive by June 5.Ms. Yellen has held her contingency plans close to the vest but signaled this week that she had been thinking about how to prepare for the worst. Speaking at a WSJ CEO Council event, the Treasury secretary laid out the difficult decisions she would face if the Treasury was forced to choose which bills to prioritize.Most market watchers expect that the Treasury Department would opt to make interest and principal payments to bondholders before paying other bills, yet Ms. Yellen would say only that she would face “very tough choices.”White House officials have refused to say if any contingency planning is underway. Early this year, Biden administration officials said they were not planning for how to prioritize payments. As the U.S. edges closer to default, the Treasury Department declined to say whether that has changed.Yet former Treasury and Federal Reserve officials said it was nearly certain that emergency plans were being devised.Christopher Campbell, who served as assistant Treasury secretary for financial institutions from 2017 to 2018, said that given the rapidly approaching X-date, “one would expect” that “there would be quiet conversations between the Treasury Department and the White House around how they would manage a technical default and perhaps prioritization of payments.”The Treasury Department has developed a default playbook from previous debt limit standoffs in 2011 and 2013. And Ms. Yellen has become quite familiar with those: During the last two significant standoffs — in 2011 and 2013 — she was a top Federal Reserve official contemplating how the central bank would try to contain fallout from a default.Ms. Yellen was briefed on the Treasury’s plans during those debates and engaged in her own contingency discussions about how to stabilize the financial system in the event that the United States could not pay all of its bills on time.According to the Fed’s transcripts, the Treasury Department did in fact plan to prioritize principal and interest payments to bondholders in the event that the X-date was breached. Although Treasury Department officials had trepidations about the idea, they had expressed to Fed officials that it could ultimately be done.Fed officials also discussed steps that they could take to stabilize money markets and to prevent failed Treasury auctions from prompting a default even if the Treasury Department was successfully paying creditors. Ms. Yellen said in both 2011 and 2013 that she was on board with plans to protect the financial system.“I expect that actions of this type might well prove unnecessary after the Treasury finally states that they do intend to pay principal and interest on time and we have finally issued our own set of policy statements,” Ms. Yellen said in 2011. “But if the stress nevertheless escalates, I’d support interventions to alleviate pressures on money market funds.”Ms. Yellen added that she was concerned about how vulnerable market infrastructure was in the event of a default and said officials should be thinking about ways to plan for a default in the future.Despite Ms. Yellen’s efforts to steer clear of the politics surrounding the debt limit, Republicans have been expressing doubts about her credibility. Haiyun Jiang/The New York Times“Given that we could face a similar situation somewhere down the road, I think it’s important for us to think about lessons learned so that we and markets will be better prepared if we face such a situation again,” Ms. Yellen said.Eric Rosengren, who was the president of the Federal Reserve Bank of Boston in 2011, said in an interview that he expected that Ms. Yellen, who is known for being rigorously prepared, was busy considering contingency plans as she did at the Fed more than a decade ago.“It would be irrational not to do some planning,” said Mr. Rosengren, adding that Ms. Yellen’s background of dealing with financial stability matters makes her well placed to be as ready as possible for the fallout of a default. “The last thing you want is to be completely unprepared and have the worst outcome.”As the debt ceiling standoff has intensified, Ms. Yellen has not been as involved in negotiations with lawmakers as her some of her predecessors.Mr. Biden tapped Shalanda Young, his budget director, and Steven J. Ricchetti, White House counselor, to lead the negotiations with House Republicans. Ms. Yellen has not attended the Oval Office meetings between Mr. Biden and Republicans.“It doesn’t look from the outside like Yellen is playing an active role in the budget negotiations,” said David Wessel, a senior economic fellow at the Brookings Institution who worked with Ms. Yellen at Brookings. “That may be that it’s not her comparative advantage, it may be that the White House wants to do it themselves, and it may be that they want to protect the credibility of Treasury predicting the X-date.”Ms. Yellen has taken a more behind the scenes role, briefing the White House on the nation’s cash reserves, calling business leaders and asking them to urge Republicans to lift the debt limit and sending increasingly regular letters to Congress warning when the federal government will be unable to pay all its bills.A White House official pointed out that Ms. Yellen has been the Biden administration’s primary messenger on the debt limit on the Sunday morning talk shows, and that she is coordinating on a daily basis with Jeffrey D. Zients, the White House chief of staff, and Lael Brainard, the director of the National Economic Council, to plot the administration’s strategy. Other officials have participated in the Oval Office meetings because the White House continues to view them as budget negotiations, the official added.The Treasury secretary also cut short a recent trip to Japan for a meeting of the Group of 7 finance ministers so she could return to Washington to deal with the debt limit.Despite Ms. Yellen’s efforts to steer clear of the politics surrounding the debt limit, Republicans have been expressing doubts about her credibility.Members of the House Freedom Caucus wrote a letter to Speaker Kevin McCarthy recently urging Republican leaders to demand that Ms. Yellen “furnish a complete justification” of her earlier projection that the U.S. could run out of cash as soon as June 1. In the letter, they accused her of “manipulative timing” and suggested that her forecasts should not be trusted because she was wrong about how hot inflation would get.The letter that Ms. Yellen sent on Friday provided a specific deadline — June 5 — and listed the upcoming payments that the federal government is required to make and explained why the Treasury Department would be unable to cover its debts beyond that date.Representative Patrick T. McHenry, a North Carolina Republican helping to lead the negotiations, said on Friday that there have been doubts about the X-date because it has been offered as a range. That, he said, is not what Americans experience when they do not have money to pay their mortgage bills on the day that they are due.“There was some skepticism of a date range — that you can pick whatever you want,” he said. “That is not how this works.”Republicans have also been targeting some of Ms. Yellen’s most prized policy priorities in the negotiations, such as rolling back some of the $80 billion that the Internal Revenue Service received as part of last year’s Inflation Reduction Act.The White House appears prepared to return $10 billion of those funds, which are intended to bolster the agency’s ability to catch tax cheats, in exchange for preserving other programs.In an interview on NBC’s Meet the Press this week, Ms. Yellen lamented that Republicans were targeting the money.“Something that greatly concerns me is that they have even been in favor of removing funding that’s been provided to the Internal Revenue Service to crack down on tax fraud,” she said.Whenever the debt limit standoff does subside, Democrats will most likely come under renewed pressure to overhaul the laws that govern the nation’s borrowing the next time they control the White House and Congress. Fearing that a fight over the debt limit would put her in the precarious position that she now faces, Ms. Yellen said in 2021 that she supported abolishing the borrowing cap.“I believe when Congress legislates expenditures and puts in place tax policy that determines taxes, those are the crucial decisions Congress is making,” Ms. Yellen said at a House Financial Services Committee hearing. “And if to finance those spending and tax decisions it is necessary to issue additional debt, I believe it is very destructive to put the president and myself, as Treasury secretary, in a situation where we might be unable to pay the bills that result from those past decisions.” More

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    Time Is Running Out for Congress to Raise the Debt Ceiling

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    With a June 5 deadline looming, there is much to be done to prevent the default that leaders of both parties said would never happen.Senator Mitch McConnell had a message for Americans growing increasingly worried that the economy is going to crash if the federal debt ceiling is not raised: Just chill.“Look, I think everybody needs to relax,” Mr. McConnell, the Kentucky Republican and minority leader with deep experience in debt limit showdowns, told reporters back home earlier this week. “Regardless of what may be said about the talks on a day-to-day basis, the president and the speaker will reach an agreement. It will ultimately pass on a bipartisan vote in both the House and the Senate. The country will not default.”That may be a case of easier said than done. While Mr. McConnell, President Biden and Speaker Kevin McCarthy have repeatedly assured Americans that there will be no default, that guarantee is looking a little shakier with little more than a week to go before the U.S. Treasury is projected to run out of cash to pay its obligations.Even if negotiators agree to a deal soon — an outcome that appeared within reach but still had not materialized as talks continued on Friday — there is still much to be done, not the least of which is winning approval in the House and Senate. That outcome is nowhere near certain given rising uneasiness — and some outright opposition — on both the right and left. At this point, no one can be absolutely certain that the United States won’t tumble over the default cliff, even if no one involved wants that to happen. Time is short.President Biden said last weekend there was a chance a default could happen. “I can’t guarantee that they wouldn’t force a default by doing something outrageous,” he told reporters. “I can’t guarantee that.”Doug Mills/The New York Times“No one can guarantee there won’t be a default, if for no other reason than the clock is ticking down here pretty quickly,” said G. William Hoagland, a longtime Republican budget guru on Capitol Hill who is now a senior vice president at the Bipartisan Policy Center. “We are on thin ice in a big way.”Negotiators got some breathing room Friday afternoon with the Treasury secretary’s announcement that the default deadline had moved four days later, to June 5. But Congress will still be hard-pressed to act by then, and the brief extension might even be counterproductive, sapping some urgency to seal a deal.“We’re within the window of being able to perform this, and we have to come to some really tough terms in these closing hours,” said Representative Patrick T. McHenry, Republican of North Carolina and a lead negotiator for Mr. McCarthy. “We’re going back on final, important matters, and it’s just not resolved.”Since the beginning of the impasse, Mr. Biden and congressional leaders have sought to tamp down concern that a default would occur, essentially saying that it was unthinkable because Congress has narrowly avoided default before. After one of the high-level meetings at the White House, Senator Chuck Schumer, the New York Democrat and majority leader, cheered the fact that all four leaders had said default was off the table.Part of their motivation in offering these constant reassurances was to bolster their own forces, calm the public and keep the financial markets from cratering as the talks wore on.But President Biden changed his tune slightly during his visit to Japan last weekend, saying for the first time that if Republicans insisted on pushing the issue to the hilt, maybe default was an option after all.“I can’t guarantee that they wouldn’t force a default by doing something outrageous,” Mr. Biden told reporters. “I can’t guarantee that.”Representative Hakeem Jeffries, the top Democrat in the House, suggested some Republicans might want a default if they could benefit from it politically.Haiyun Jiang/The New York TimesRepresentative Hakeem Jeffries, Democratic of New York and the minority leader, expressed a similar sentiment when asked this week if he could still be certain the government would not default.“Not with this group,” he said, referring to Republicans, some of whom he suspects would not mind the financial chaos resulting from a default if they thought it could help them politically in 2024.Mr. McCarthy, the House leader and a California Republican, has also stated repeatedly that there would be no default and on Friday emphasized that he believed that a positive outcome would be the result.“I’m a total optimist,” he told reporters as negotiations continued with no apparent breakthrough.One way Mr. McCarthy has said a default could be avoided is for the Senate to pass and the president to sign the measure Republicans passed in the House raising the debt limit while making steep budget cuts and rolling back other Biden administration initiatives. But that is unlikely to happen even if the Treasury runs out of money. Mr. McCarthy has also ruled out an emergency short-term suspension of the debt ceiling.Representatives Garret Graves, left, and Patrick McHenry are two of the negotiators for the Republicans.Haiyun Jiang/The New York TimesEven an agreement between House Republicans and Mr. Biden would not end the drama; in some respects, it would be just the beginning.House Republicans have a 72-hour rule for the time between when the legislation is made public and when it is to be voted on, a timeline that pushes the showdown ever closer to the Treasury’s early June deadline.Plus, with hard-right elements of the Republican conference joining progressive Democrats in expressing reservations about the deal taking shape, Mr. McCarthy and Mr. Jeffries may have to thread the needle to produce the necessary votes from both sides to win approval of the deal.Mr. McCarthy and his leadership team will have to assess extremely accurately the number of Republicans committed to voting for any final budget deal with a debt limit increase attached. Then they will need to let Mr. Jeffries know the number of votes Democrats need to produce to make sure at least 218 lawmakers will support the package.House Republicans have a 72-hour rule for the time between when the legislation is made public and when it is to be voted on, which makes the deadline to tight.Kenny Holston/The New York TimesMiscalculation could mean disaster. With the nation in a dire financial crisis in September 2008, the House stunned the Bush administration by failing to pass its bank bailout program. In a chaotic turn of events on the House floor, the measure failed as many Republicans refused to back it despite presidential pleas and some Democrats balked as well. The stock market tumbled in real time as the vote unfolded. Four days later, rattled House members came back and approved the proposal with a few changes.Some believe that it might require a similar scenario now to push the debt limit plan through Congress — a failed vote and market drop that underscores the economic consequences of a default and motivates lawmakers to act. Others would prefer it not come to that given the potentially severe ramifications of even a brief default.“I have been of the optimistic view that it wouldn’t happen, but the longer it goes on, the more likely it seems to me,” said Mr. Hoagland, the budget expert. “Time has run out for getting this done, but I am just praying a default doesn’t happen.”Luke Broadwater More

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    Debt Ceiling Crisis: How a Default Could Unfold

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    Here’s a look at what markets are expecting and planning for, and how a default might happen.The United States is inching closer to calamity, as lawmakers continue to spar over what it will take to raise the country’s $31.4 trillion debt limit.That has raised questions about what will happen if the United States does not raise its borrowing cap in time to avoid defaulting on its debt, along with how key players are preparing for that scenario and what would actually happen should the Treasury Department fail to repay its lenders.Such a situation would be unprecedented, so it’s difficult to say with certainty how it would play out. But it’s not the first time investors and policymakers have had to contemplate “what if?” and they’ve been busy updating their plans for how they think things may play out this time.While negotiators appear to be moving toward an agreement, time is short. There is no certainty that the debt limit will be lifted before June 5, when the Treasury now estimates the government will run out of cash to pay all of its bills on time, a moment known as the “X-date.”“We’ve got to be in the closing hours because of the timeline,” said Representative Patrick McHenry, a North Carolina Republican who is involved in the talks. “I don’t know if it’s in the next day or two or three, but it’s got to come together.”Big questions remain, including what could happen in the markets, how the government is planning for default and what happens if the United States runs out of cash. Here’s a look at how things could unfold.Before the X-DateFinancial markets have become more jittery as the United States moves closer to the X-date. While exuberance over the profit-boosting expectations of artificial intelligence has helped the stock market recover, fears about the debt limit persist. On Friday, the S&P 500 rose 1.3 percent, a modest gain of 0.3 percent for the week.This week, Fitch Ratings said it was placing the nation’s top AAA credit rating on review for a possible downgrade. DBRS Morningstar, another rating firm, did the same on Thursday.For now, the Treasury is still selling debt and making payments to its lenders.That has helped mollify some concerns that the Treasury won’t be able to repay debt coming due in full, as opposed to just an interest payment. That’s because the government has a regular schedule of new Treasury auctions where it sells bonds to raise fresh cash. The auctions are scheduled in a way so that the Treasury receives its new borrowed cash at the same time that it pays off its old debts.That allows the Treasury to avoid adding much to its outstanding $31.4 trillion debt load — something it can’t do right now since it enacted extraordinary measures after coming within a whisker of the debt limit on Jan. 19. And it should give the Treasury the cash it needs to avoid any disruption to payments, at least for now.This week, for example, the government sold two-year, five-year and seven-year bonds. However, that debt doesn’t “settle” — meaning the cash is delivered to the Treasury and the securities delivered to the buyers at the auction — until May 31, coinciding with three other securities coming due.More precisely, the new cash being borrowed is slightly larger than the amount coming due, with the tricky act of balancing all of the money coming in and out pointing to the Treasury’s challenge in the days and weeks ahead.When all the payments are tallied, the government ends up with a little over $20 billion of extra cash, according TD Securities.Some of that could go to the $12 billion of interest payments that the Treasury also has to pay that day. But as time goes on, and the debt limit becomes harder to avoid, the Treasury may have to postpone any incremental fund-raising, as it did during the debt limit standoff in 2015.After the X-Date, Before DefaultThe U.S. Treasury pays its debts through a federal payments system called Fedwire. Big banks hold accounts at Fedwire, and the Treasury credits those accounts with payments on its debt. These banks then pass the payments through the market’s plumbing and via clearing houses, like the Fixed Income Clearing Corporation, with the cash eventually landing in the accounts of holders from domestic retirees to foreign central banks.The Treasury could try to push off default by extending the maturity of debt coming due. Because of the way Fedwire is set up, in the unlikely event that the Treasury chooses to push out the maturity of its debt it will need to do so before 10 p.m. at the latest on the day before the debt matures, according to contingency plans laid out by the trade group Securities Industry and Financial Markets Association, or SIFMA. The group expects that if this is done, the maturity will be extended for only one day at a time.Investors are more nervous that should the government exhaust its available cash, it could miss an interest payment on its other debt. The first big test of that will come on June 15, when interest payments on notes and bonds with an original maturity of more than a year come due.Moody’s, the rating agency, has said it is most concerned about June 15 as the possible day the government could default. However, it may be helped by corporate taxes flowing into its coffers next month.The Treasury can’t delay an interest payment without default, according to SIFMA, but it could notify Fedwire by 7:30 a.m. that the payment will not be ready for the morning. It would then have until 4:30 p.m. to make the payment and avoid default.If a default is feared, SIFMA — alongside representatives from Fedwire, the banks and other industry players — has plans in place to convene up to two calls the day before a default could occur and three further calls on the day a payment is due, with each call following a similar script to update, assess and plan for what could unfold.“On the settlement, infrastructure and plumbing, I think we have a good idea of what could happen,” said Rob Toomey, head of capital markets at SIFMA. “It’s about the best we can do. When it comes to the long-term consequences, we don’t know. What we are trying to do is minimize disruption in what will be a disruptive situation.”Default and BeyondOne big question is how the United States will determine if it has actually defaulted on its debt.There are two main ways the Treasury could default: missing an interest payment on its debt, or not repaying its borrowings when the full amount becomes due.That has prompted speculation that the Treasury Department could prioritize payments to bondholders ahead of other bills. If bondholders are paid but others are not, ratings agencies are likely to rule that the United States has dodged default.But Treasury Secretary Janet L. Yellen has suggested that any missed payment will essentially amount to a default.Shai Akabas, director of economic policy at the Bipartisan Policy Center, said an early warning sign that a default was coming could arrive in the form of a failed Treasury auction. The Treasury Department will also be closely tracking its expenditures and incoming tax revenue to forecast when a missed payment could happen.At that point, Mr. Akabas said, Ms. Yellen is likely to issue a warning with the specific timing of when she predicts the United States will not be able to make all of its payments on time and announce the contingency plans she intends to pursue.For investors, they will also receive updates through industry groups tracking the key deadlines for the Treasury to notify Fedwire that it will not make a scheduled payment.A default would then set off a cascade of potential problems.Rating firms have said a missed payment would merit a downgrade of America’s debt — and Moody’s has said it will not restore its Aaa rating until the debt ceiling was no longer subject to political brinkmanship.International leaders have questioned whether the world should continue to tolerate repeated debt-ceiling crises given the integral role the United States plays in the global economy. Central bankers, politicians and economists have warned that a default would most likely tip America into a recession, leading to waves of second order effects from corporate bankruptcies to rising unemployment.But those are just some of the risks known to be lurking.“All of this is uncharted waters,” Mr. Akabas said. “There’s no playbook to go by.”Luke Broadwater More

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    White House and GOP Close In on Deal to Raise Debt Ceiling

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    The details had yet to be finalized, but negotiators were discussing a compromise that would allow Republicans to point to spending reductions and Democrats to say they had protected against large cuts.Top White House officials and Republican lawmakers were closing in Thursday on a deal that would raise the debt limit for two years while capping federal spending on everything but the military and veterans for the same period. Officials were racing to cement an agreement in time to avert a federal default that is projected in just one week.The deal taking shape would allow Republicans to say that they were reducing some federal spending — even as spending on the military and veterans’ programs would continue to grow — and allow Democrats to say they had spared most domestic programs from significant cuts.Negotiators from both sides were talking into the evening and beginning to draft legislative text, though some details remained in flux.“We’ve been talking to the White House all day, we’ve been going back and forth, and it’s not easy,” Mr. McCarthy told reporters as he left the Capitol on Thursday evening, declining to divulge what was under discussion. “It takes a while to make it happen, and we are working hard to make it happen.”The compromise, if it can be agreed upon and enacted, would raise the government’s borrowing limit for two years, past the 2024 election, according to three people familiar with it who insisted on anonymity to discuss a plan that was still being hammered out.The United States hit the legal limit, currently $31.4 trillion, in January and has been relying on accounting measures to avoid defaulting since then. The Treasury Department has projected it will exhaust its ability to pay bills on time as early as June 1.In exchange for lifting the debt limit, the deal would meet Republicans’ demand to cut some federal spending, albeit with the help of accounting maneuvers that would give both sides political cover for an agreement likely to be unpopular with large swaths of their base voters.It would impose caps on discretionary spending for two years, though those caps would apply differently to spending on the military than to nondefense discretionary spending. Spending on the military would grow next year, as would spending on some veterans’ care that falls under nondefense discretionary spending. The rest of nondefense discretionary spending would fall slightly — or roughly stay flat — compared with this year’s levels.The deal would also roll back $10 billion of the $80 billion Congress approved last year for an I.R.S. crackdown on high earners and corporations that evade taxes — funding that nonpartisan scorekeepers said would reduce the budget deficit by helping the government collect more of the tax revenue it is owed — though that provision was still under discussion. Democrats have championed the initiative, but Republicans have denounced it, claiming falsely that the money would be used to fund an army of auditors to go after working people.“The president and his negotiating team are fighting hard for his agenda, including for I.R.S. funding so it can provide better customer service to taxpayers and crack down on wealthy tax cheats,” a White House spokesman, Michael Kikukawa, said in an email on Thursday in response to a question about the provision.As the deal stood on Thursday, the I.R.S. money would essentially shift to nondefense discretionary spending, allowing Democrats to avoid further cuts in programs like education and environmental protection, according to people familiar with the pending agreement.The plan had yet to be finalized, and the bargainers continued to haggle over crucial details that could make or break any deal.“Nothing is done until you actually have a complete deal,” said Representative Patrick T. McHenry of North Carolina, one of the lead G.O.P. negotiators, who also declined to discuss the specifics of the negotiations. “Nothing’s resolved.”The cuts contained in the package were all but certain to be too modest to win the votes of hard-line fiscal conservatives in the House. Liberal groups were already complaining on Thursday about the reported deal to reduce the I.R.S. funding increase.But people familiar with the developing deal said that negotiators had agreed to fund military and veterans’ programs at the levels envisioned by President Biden in his budget for next year. They would reduce nondefense discretionary spending below this year’s levels — but much of that cut would be covered by the shift in the I.R.S. funding and other budgetary maneuvers. White House officials have contended those shifts would functionally make nondefense discretionary spending the same next year as it was this year.All discretionary spending would then grow at 1 percent in 2025, after which the caps would lift.Mr. McCarthy on Thursday had nodded to the idea that a compromise to avert a default would likely draw detractors from both parties.“I don’t think everybody is going to be happy at the end of the day,” he said. “That’s not how this system works.”Another provision of the deal seeks to avert a government shutdown later in the year, and would attempt to take away Republicans’ ability to seek deeper cuts to government programs and agencies through the appropriations process later in the year.The exact details on how such a measure would work remained unclear on Thursday evening. But it was based on a penalty of sorts, which would adjust the spending caps in the event that Congress failed to pass all 12 stand-alone spending bills that fund the government by the end of the calendar year.Negotiators were still at loggerheads over work requirements for social safety net programs and permitting reform for domestic energy and gas projects.“We have legislative work to do, policy work to do,” Mr. McHenry said. “The details of all that stuff really are consequential to us being able to get this thing through.”As negotiators inched closer to a deal, hard-right Republicans on Thursday were becoming increasingly anxious that Mr. McCarthy would sign off on a compromise they view as insufficiently conservative. Several right-wing Republicans have already vowed to oppose any compromise that retreats from cuts that were part of their debt-limit bill.“Republicans should not cut a bad deal,” Representative Chip Roy of Texas, an influential conservative, wrote on Twitter on Thursday morning, shortly after telling a local radio station that he was “going to have to go have some blunt conversations with my colleagues and the leadership team” because he did not like “the direction they are headed.”Representative Ralph Norman of South Carolina, said he was reserving judgment on how he would vote on a compromise until he saw the bill, but added: “What I’ve seen now is not good.”Former President Donald J. Trump, who has said that Republicans should force a default if they do not get what they want in the negotiations, also was weighing in. Mr. McCarthy told reporters he had spoken with Mr. Trump briefly about the negotiations — “it came up just for a second,” the speaker said. “He was talking about, ‘Make sure you get a good agreement.’”After playing a tee shot on his golf course outside of Washington, Mr. Trump approached a reporter for The New York Times, iPhone in hand, and showed a call with Speaker Kevin McCarthy.“It’s going to be an interesting thing — it’s not going to be that easy,” said Mr. Trump, who described his call with the speaker as “a little, quick talk.”“They’ve spent three years wasting money on nonsense,” he added, saying, “Republicans don’t want to see that, so I understand where they’re at.”Luke Broadwater More

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    Military Spending Emerges as Big Dispute in Debt-Limit Talks

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    President Biden has offered to freeze discretionary spending, including for defense. Republicans want to spend more for the military, and cut more elsewhere.Funding for the military has emerged as a key sticking point in reaching an agreement to raise the nation’s borrowing limit and prevent a catastrophic default, with Republicans pushing to spare the Defense Department from spending caps and make deeper cuts to domestic programs like education.President Biden has balked at that demand, pointing to a long series of past budget agreements that either cut or increased military spending in tandem with discretionary programs outside of defense.How the sides resolve that issue will be critical for the final outcome of any debt deal. It remains possible that in order to reach a deal that prevents a default, Democrats will accept an agreement that allows military spending to grow even as nondefense spending falls or stays flat.Mr. Biden’s aides and congressional Republicans deputized by Speaker Kevin McCarthy are trying to negotiate an agreement to lift the borrowing limit before the government runs out of money to pay its bills on time, which could be as soon as June 1. Republicans have refused to raise the limit unless Mr. Biden agrees to cuts in federal spending outside of the military.The talks over spending cuts have narrowed in focus to mostly cover a relatively small corner of the budget — what is known as discretionary spending. That spending is split into two parts. One is money for the military, which the Congressional Budget Office estimates will total $792 billion for the current fiscal year. The other half funds a wide range of domestic programs, like Head Start preschool and college Pell Grants, and federal agencies like the Interior and Energy Departments. It will total $919 billion this year, the budget office estimates.A separate category known as mandatory spending has largely been deemed off limits in the talks. That spending, which is the primary driver of future spending growth, includes programs like Social Security and Medicare.Administration officials have proposed freezing both halves of discretionary spending for next year. That would amount to a budget cut, compared with projected spending, under the way the budget office accounts for spending levels. Spending for both parts of the discretionary budget would be allowed to grow at just 1 percent for the 2025 fiscal year. That could also amount to a budget cut since 1 percent would almost certainly be less than the rate of inflation. That proposal would save about $1 trillion over the span of a decade, compared with current budget office forecasts.Republicans rejected that plan at the bargaining table. They are pushing to cut nondefense spending in actual terms — meaning, spend fewer dollars on it next year than the government spent this year. They also want to allow military spending to continue to grow.“It just sends a bad message and Republicans feel like it would not be in our best interest to cut spending at this juncture, when you’re looking at China and Russia and a lot of instability around the world,” said Representative Robert B. Aderholt, Republican of Alabama, who sits on an Appropriations panel that oversees Pentagon spending. “That’s been the basic position that most Republicans have.”Mr. McCarthy sounded a similar note when speaking to reporters on Thursday. “Look, we’re always looking where we could find savings and others, but we live in a very dangerous world,” he said. He added, “I think the Pentagon has to actually have more resources.”Republicans included 10-year caps on discretionary spending in a bill they passed last month that also raised the debt ceiling through next year, and party leaders said they would exempt the military from those caps. Mr. Biden has vowed to veto the bill if it passes the Senate in its current form, which is unlikely.White House officials have hammered Republicans over concentrating their proposed discretionary savings on domestic programs, saying their bill would gut spending on border enforcement, some veterans’ care, Meals on Wheels for older Americans and a host of other popular programs.“Speaker McCarthy and I have a very different view of who should bear the burden of additional efforts to get our fiscal house in order,” Mr. Biden said on Thursday at the White House. “I don’t believe the whole burden should fall on the backs of the middle class and working-class Americans.”Congressional Democrats, including members of committees that oversee military spending, have attacked Republicans for focusing largely on nondefense programs.“If you’re going to freeze discretionary spending, there’s no reason on earth why defense shouldn’t be part of that conversation,” said Representative Adam Smith of Washington, the top Democrat on the Armed Services Committee. Republicans, he said, “are taking a hostage to advance their very narrow agenda. I’m not a fan of that. That’s not something I’m going to want to support.”Any agreement that increased military spending while freezing or cutting other discretionary spending would break from a budget-deal tradition that dates to 2011, when House Republicans refused to raise the debt limit until President Barack Obama agreed to spending cuts. The deal that avoided default was centered on spending caps that split their reductions evenly between defense and nondefense programs.The push to increase military funding while cutting more heavily elsewhere reflects a divide in the House Republican caucus. It includes a large faction of defense hawks who say the military budget is too small, alongside another large faction of spending hawks who want to significantly shrink the fiscal footprint of the federal government.Mr. McCarthy needs both factions to retain his hold on the speakership, which he narrowly won this year after a marathon week of efforts to secure the votes. And he will need to navigate them both as he tries to pass any debt-limit agreement with Mr. Biden through the House.Catie Edmondson More

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    McCarthy Renews Call for Spending Cuts as Debt Talks Grind On

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    With a potential default just over a week away, a resolution remained elusive and Republican leaders told lawmakers they could return home for the holiday break.With a potential federal default just over a week away, a resolution to the debt limit crisis remained out of reach on Wednesday as White House and top Republican negotiators reported no breakthrough in another marathon day of discussions and members of Congress prepared to leave the capital for the holiday weekend.Negotiators met for roughly four hours on Wednesday afternoon at the White House and were silent upon leaving, which some regarded as a hopeful sign after days of public posturing from both sides. Representative Patrick T. McHenry, Republican of North Carolina and a key bargainer, rushed past reporters at the Capitol saying: “No news.”Speaker Kevin McCarthy stayed uncharacteristically close-lipped after the meeting ended, leaving the Capitol on Wednesday night without speaking to reporters. But he expressed cautious optimism, telling Fox Business that “things are going a little better.”“I think today they would say they’re making progress,” Mr. McCarthy said of the negotiators.With no deal imminent, Republican leaders told lawmakers they were free to return home for the Memorial Day weekend, but could be summoned back on short notice to vote. The announcement made clear that Mr. McCarthy and his deputies did not expect a resolution to avert a default to materialize until next week, just days from the projected June 1 deadline.At the same time, the speaker sought to reassure the markets that a deal could be reached.“I would not, if I was in the markets, be afraid of anything in this process,” he said. “I wouldn’t scare the markets in any shape or form. We will come to an agreement worthy of the American public, and there should not be any fear. Money is coming in every day.”Before the meeting, Mr. McCarthy sought to pressure President Biden and congressional Democrats to accept spending cuts to domestic programs in exchange for raising the debt limit and allowing the Treasury Department to avoid missing payments.“You have to spend less than you spent last year,” Mr. McCarthy said at a news conference in the Capitol as Biden administration and Republican negotiators gathered at the White House. “That is not that difficult to do. But in Washington, somehow that is a problem.”The administration has resisted cuts and instead pushed for a freeze on current spending levels. With Republicans insisting there be no cuts to defense or veterans’ programs, the brunt of the reductions would affect social programs that Democrats favor.Right-wing Republicans have vowed to oppose any compromise that retreats from cuts that were part of their debt-limit bill, which was approved last month along party lines, so Mr. McCarthy is likely to need a substantial number of Democratic votes to pass any agreement. But congressional Democrats are resisting cuts in the overall budget.Representative Pramila Jayapal of Washington, the chairwoman of the Progressive Caucus, said at a news conference that White House officials told her on Tuesday night that House G.O.P. negotiators had rejected proposals that could have reduced the deficit by $3 trillion, including closing tax loopholes and imposing new taxes on the highest earners. Mr. McCarthy has repeatedly said that Republicans will not accept any tax increases.“We will continue to call out and reject this reckless hostage-taking from extreme MAGA Republicans,” Ms. Jayapal said.In an effort to pressure Mr. McCarthy and other Republicans not to accept any deal that falls short of the House-passed bill, Representative Chip Roy of Texas, an influential hard-liner, released a memo asserting that every measure in the legislation was “critical.”“None should be abandoned solely for the quest of a ‘deal’,” Mr. Roy wrote.Many Democrats, too, were arguing against any compromise. Their leaders announced on Wednesday that the final two members of their caucus had signed a discharge petition aimed at bypassing Republican leaders and forcing debt-limit legislation to the floor. With their 213 signatures, Democrats would need at least five Republicans to break ranks and sign the petition for it to trigger such a vote. Democratic leaders called on Republicans to show that they are not allied with the most extreme wing of their party and help advance the petition to avert an economic catastrophe.“It does appear increasingly likely that House Republicans want a dangerous default, they want to crash the economy and they want to trigger a job-killing recession,” said Representative Hakeem Jeffries, Democrat of New York and the minority leader. “It’s my hope that five Republicans from New York or California or other moderate districts throughout the country can prove me wrong.”The House is set to begin a weeklong Memorial Day recess on Friday. Representative Steve Scalise of Louisiana, the No. 2 Republican, advised lawmakers on Wednesday night that they should be prepared to return to the Capitol within 24 hours to approve a compromise bill. Mr. McCarthy has vowed to give lawmakers 72 hours to review any plan.Treasury Secretary Janet L. Yellen has warned repeatedly that the government could exhaust its ability to meet all of its obligations by June 1. More

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    Yellen Warns of Missed Payments if Debt Limit Is Not Lifted

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    The Treasury secretary said the Biden administration would face “very tough choices” if Congress did not act.Treasury Secretary Janet L. Yellen said on Wednesday that it was “almost certain” that the United States would not have enough cash to continue to pay all of its bills on time beyond early June and that she would soon provide Congress with a more precise update about when the nation could default if the debt limit was not raised.The comments, made at a WSJ CEO Council event, came as negotiators for the White House and House Republicans raced to reach a deal to raise the debt limit and reduce government spending that Congress can pass before June 1. The Treasury secretary reiterated her warning that a default would inflict severe damage on the U.S. economy and made the case that she would be left with no good options to contain the fallout.“Treasury and President Biden will face very tough choices if Congress doesn’t act to raise the debt ceiling and if we hit the so-called X-date without that occurring,” Ms. Yellen said. “There will be some obligations that we will be unable to pay.”Ms. Yellen declined to elaborate on how exactly she would proceed if the debt limit was not lifted, but she dismissed the idea that “prioritizing” certain payments that the government was required to make would be an easy solution. She noted that government payment systems were devised to pay bills on time, not to decide which ones to pay.“Prioritization is not really something that is operationally feasible,” she said.This week, Ms. Yellen notified Congress that the federal government could run out of cash as soon as June 1. Her projections have been met with skepticism by some House Republicans, who have been calling on her to produce an analysis that details the Treasury Department’s cash reserves to prove that the deadline is real.Ms. Yellen said on Wednesday that there was considerable uncertainty associated with tracking government payments and receipts but that she planned to provide as much clarity as possible in her next update.The Treasury secretary said she was already seeing “the beginnings” of stress in financial markets due to the brinkmanship. However, she said she had not been engaging with investors about what would happen if the debt limit was not lifted.“We are committed to not having missed payments and raising the debt ceiling,” Ms. Yellen said. “We are not involved in planning for what happens if there is a default.”Despite her concerns, she said that she was hopeful the negotiations would be successful and that the Biden administration had been committed to policies that would reduce deficits.“I think a deal is possible,” Ms. Yellen said. “They’re working toward an agreement that could command bipartisan support.” More

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    Potential Debt Ceiling Deal Would Barely Change Federal Spending Path

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    Negotiators have focused on a relatively small corner of the budget, shunning new revenues or cuts to the fastest-growing programsAs their debt limit negotiations with President Biden push the nation perilously close to a devastating default, House Republicans have stuck to a clear message: They must force a change in what they call the nation’s “unsustainable” spending path.Yet in talks with Mr. Biden, Speaker Kevin McCarthy and his lieutenants have focused almost entirely on cutting a small corner of the budget — known as nondefense discretionary spending — that includes funding for education, environmental protection, national parks, domestic law enforcement and other areas. That budget line accounts for less than 15 percent of the $6.3 trillion the government is expected to spend this year. It is not outsized, by historical standards. It is already projected to shrink, as a share of the economy, over the next decade.And it has nothing to do with the big drivers of projected spending growth in the coming years: the safety-net programs Social Security and Medicare, which are facing increasingly large payouts as the American population ages.Those politically popular programs have been deemed off limits in the current talks by Republicans, who came under heavy criticism from Mr. Biden for even entertaining changes that could raise the retirement age for those programs or make other changes to slow their future spending.Republicans have also refused to entertain cuts to military spending, which is nearly as large as nondefense discretionary spending. As a result, the negotiations are almost certain not to produce any agreement with Mr. Biden that would dramatically alter the course of federal spending in the next decade.Instead, they would concentrate budget cuts on education, environmental protection and a host of other government services that fiscal experts say are nowhere close to being primary sources of spending growth in the years to come.For instance, if Republicans could somehow persuade Mr. Biden to accept the full round of discretionary spending cuts contained in the fiscal bill the House passed last month, it would do little to alter the nation’s overall spending trajectory over the next decade. Those cuts would reduce federal spending by about $470 billion in 2033 and likely save about $100 billion that year in borrowing costs, according to the Congressional Budget Office.Total government spending would then be just under 24 percent of the economy — or nearly exactly what it is today.While those cuts might not make much of a dent in the overall budget, they would still be felt by many Americans. Because the cuts would be so contained to one segment, many popular government programs would shrink by as much as 30 percent under that scenario, White House officials and independent analysts have calculated.“The cuts Republicans propose would have severe impacts on education, public safety, child care, veterans’ health care and more,” the White House budget director, Shalanda Young, wrote in a memo last week.Republicans have for months cited growing federal spending and debt as the reason they have refused to raise the nation’s borrowing limit — risking default — unless Mr. Biden agrees to spending cuts.Representative Garret Graves of Louisiana, one of Mr. McCarthy’s top negotiators, said this week that the biggest gap with Biden administration officials was on spending numbers. “My interpretation of their position is that they fail to recognize or fail to see to the fact that we are on a spending trajectory right now that is absolutely unsustainable,” he said.Federal spending spiked during the Covid-19 pandemic, first under President Donald J. Trump and continuing under Mr. Biden, as lawmakers delivered trillions of dollars in assistance to businesses, people and state and local governments. It remains higher than historical norms, when measured as a share of the economy, which is the easiest way to track spending patterns as prices have increased over time.The Congressional Budget Office estimates that total spending averaged just under 21 percent of gross domestic product from 1980 through 2019, just before the pandemic hit. It surged above 30 percent in 2020 and 2021. This fiscal year, it is expected to be just over 24 percent, falling slightly over the next several years and then beginning to grow again in the waning years of this decade, climbing past 25 percent in 2033.Discretionary spending, though, is expected to decline over the decade as a share of the economy. Military spending — which Republicans have thus far refused to reduce as part of talks with Mr. Biden’s team — should tick down slightly from 3 percent of the economy. Discretionary spending outside the military is now 3.6 percent but is expected to fall to 3.2 percent by 2033.Social Security and Medicare, conversely, are expected to grow rapidly over the next 10 years, as retiring baby boomers qualify to receive health and retirement benefits. Social Security spending will rise from 4.8 percent to 6 percent of the economy in that time, the budget office projects, and Medicare will rise from 3.9 percent to 5.3 percent.Analysts say those programs are the primary reason budget forecasts have long shown federal spending increasing in the coming decades — even before Mr. Biden took office.“The entirety of the overall federal spending increase relative to G.D.P. over the long term can be accounted for by the growth in the major federal health programs (Medicare, Medicaid, and the A.C.A.) and Social Security,” Charles P. Blahous, who studies federal spending and debt at the Mercatus Center at George Mason University, told the Senate Budget Committee this month in written testimony.Conservative groups have criticized Republicans for not including the safety-net programs in debt demands. “While current debt ceiling negotiations largely concern ways to restrain the discretionary parts of the budget, any serious proposal to tackle the emerging debt and deficit crisis must also address our largest mandatory spending programs: Social Security and Medicare,” Alex Durante, an economist at the Tax Foundation, which promotes lower taxes, wrote on Wednesday.Liberal groups and the White House have criticized Mr. McCarthy and his team for neglecting the other side of the fiscal ledger: the nation’s tax system. Tax receipts briefly surged last year but are expected to fall back toward historical norms this year, stabilizing around 18 percent of the economy, the budget office projects. Mr. McCarthy has cited last year’s numbers to incorrectly claim current tax revenues are near record highs. More