The impeding doom from the debt ceiling is closing

The impending deadline for the United States to settle its financial obligations and prevent a historic national default looms near. In a race against time, legislators in Washington are fervently working towards reaching an agreement that would temporarily suspend the US debt limit, thereby averting a potentially catastrophic outcome for both the domestic and global economy.

At present, the US debt ceiling stands at $31.4tn, a threshold reached back in January. Since then, the treasury has resorted to employing extraordinary measures to stave off the ominous specter of default.

Just recently, Janet Yellen, the treasury secretary, issued a stern warning to lawmakers, emphasizing that the US must fulfill its debt obligations by June 5th, lest the government plunge into default.

The negotiations have yielded a prospective deal that seeks to suspend the debt limit and sidestep a debt default. Representatives for Joe Biden and House speaker Kevin McCarthy managed to broker this tentative agreement over the weekend.

Following this development, the clock started ticking for House members, granting them a window of 72 hours to scrutinize the deal and cast their votes during a floor vote.

Subsequently, the influential House rules committee convened to evaluate the agreement, dubbed the Fiscal Responsibility Act of 2023, on Tuesday afternoon. If approved by a simple majority within the House, the bill will then proceed to the Senate for further examination, a process that may extend over several days. Senate majority leader Chuck Schumer has urged senators to prepare for a vote on Friday, and potentially even the weekend, in order to meet the looming June 5th deadline.

Once the bill has successfully navigated both chambers of Congress, it will ultimately land on the president's desk for the final approval and signing.

While many legislators have expressed confidence in the bill's prospects for passage, certain staunch Republicans have indicated their unwillingness to endorse the agreement. Representative Chip Roy of Texas, a member of the rules committee, has publicly advocated for voting against the deal, stating that it should not be accepted.

Should the bill triumph, it would entail a suspension of the US debt limit until January 1st, 2025, extending well beyond the upcoming presidential election slated for November 2024. Nevertheless, this suspension is a temporary solution, and the nation will still need to reduce its national debt or raise the ceiling by the newly established deadline.

Under the proposed agreement, non-defense spending will remain relatively unchanged for fiscal year 2024, with a 1% increase slated for fiscal year 2025. Additionally, the bill incorporates new restrictions on Snap benefits, curtailing the number of individuals eligible for food stamps. Moreover, approximately $30bn in unspent emergency aid allocated for Covid-19 relief will be reclaimed by the government.

In the event of a national default, the US credit rating would likely plummet from its current AAA status, the highest rating possible. A diminished credit rating heightens the risk for international lenders and amplifies the costs associated with loans for American individuals.

The United States last encountered the precipice of a national default in 2011, an episode that culminated in one credit rating agency, S&P, downgrading the nation's credit rating. The downgrade was attributed to perceived policy-making woes in Washington. Consequently, markets experienced a sharp decline, triggering ripple effects across the global economy and escalating the expenses for average consumers seeking mortgages or vehicle loans.

Looking ahead, concessions from both sides of the political aisle are necessary. Biden and McCarthy must assuage their respective party members in light of the upcoming major election year, during which both leaders are seeking re-election.

In a letter addressed to McCarthy, Yellen emphasized the lessons learned from prior debt limit impasses, cautioning against the perils of waiting until the eleventh hour to suspend or raise the debt limit. She stressed the detrimental impact such delays have on business and consumer confidence, the short-term borrowing costs shouldered by taxpayers, and the credit rating of the United States.