As the deadline to raise the debt ceiling draws closer, lawmakers are still locked in a heated debate about what concessions may be acceptable.
- Raising the debt ceiling has become increasingly controversial in recent years as the national debt continues to grow.
- Often, the debt ceiling is lifted with little argument, but recently it has become a more controversial issue as lawmakers make raising the limit contingent on other spending cuts.
- Even with some close calls in recent years, the U.S. has still not defaulted on its debt obligation, Fortune reports.
- The areas most likely to feel the pain from a default—programs like Social Security, people looking to borrow money, tenuous jobs, and the country’s credit rating.
Why it’s news
The debt ceiling must be raised eventually for the federal government to continue operating. While some programs may temporarily lose funding, recipients should eventually receive their payments. However, a default could have longer-lasting effects on the economy, and some of these consequences may come about even if the government raises the debt ceiling before the deadline.
The first area to be affected by default would be government-funded programs like Social Security. Rather than paying Social Security benefits, the government would likely be forced to divert all resources toward paying its debt obligations, leaving millions of beneficiaries without payments.
For those dependent on these programs, a delay in payment could mean an inability to pay bills or rent. Federal contractors and employees would also go without pay for an undetermined amount of time. While these groups would likely receive back pay eventually, the uncertainty of the situation could have serious repercussions.
Senior citizens and others who rely entirely on these benefits may not have a safety net to get them through a benefits pause.
Longer-lasting consequences could take the form of higher interest rates. Already interest rates in the U.S. are higher than in years past, but failing to lift the debt ceiling could push the U.S. into a recession, Fortune reports.
The added strain on an already struggling economy would push interest rates higher for things like mortgages, car loans, credit cards, and business loans. Even after a debt ceiling resolution, these consequences could remain. The U.S. Treasury securities would no longer be viewed as risk-free investments.
Even if the government comes to a resolution before the deadline, interest rates still could be affected. In 2011, the debate over the debt ceiling resulted in a more than $1 billion increase in borrowing costs, Fortune reports. Taxpayers could still see adverse effects of the debate, even with a resolution this week.
U.S. jobs could also be affected by a default. An estimated 8 million workers could lose their jobs according to recent White House economist estimates. The expected recession resulting from a default would almost certainly affect the job market.
A report from Moody’s Analytics found that a default could result in stocks declining as much as one-third and a loss of $12 trillion in household wealth.
“The timing could not be worse for the economy; even before the specter of a debt limit breach, many CEOs and economists believe a recession is likely this year,” Moody’s researchers say.
Behind the debate
The U.S. reached its debt limit earlier than expected at the beginning of this year. Treasury Secretary Janet Yellen enacted what the Treasury calls “extraordinary measures” to keep the government afloat. These accounting maneuvers will temporarily prevent the government from defaulting on its obligations.
Republicans, led by Speaker of the House Kevin McCarthy, want to attach spending cuts to any legislation that raises the debt limit. The White House wants to raise the debt ceiling without stipulations. Initially, President Joe Biden said that he would not negotiate with Republicans. However, President Biden recently sat down with McCarthy to discuss his terms.
After the first meeting earlier this week, McCarthy says he is encouraged by President Biden’s willingness to negotiate, and he does not think that the U.S. will default on its debt. However, the Speaker did not say he felt optimistic about the discussions, CNBC reports.
“The only thing I’m confident about is now we have a structure to find a way to come to a conclusion,” McCarthy says. “The timeline is very right. But we’re going to make sure we’re in the room and get this done.”
Before negotiations began, White House spokesperson Karine Jean-Pierre said, “It’s time for Republicans to stop playing games, agree to pass a clean debt ceiling bill, and quit threatening to wreak havoc on our economy. And if they want to have a conversation about our nation’s economic and fiscal future, it’s time for them to put out a budget—as the president has done with his detailed plan to grow the economy, lower costs, and reduce the deficit by nearly $3 trillion.”