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As businesses take their cues from Washington, it's more important than ever to be aware of the current debates taking place in the nation's capital. One of the most pressing topics currently being discussed is the debt ceiling debate; an issue that could have far-reaching impacts across the United States. Buchanan’s Federal Government Relations team discusses recent developments involving the debt ceiling, and why it matters for you and your business.

The Debt Ceiling Debate in Washington - Quick Links:

What is the Debt Ceiling? (top)

The debt ceiling (or debt limit) is the total amount of money the U.S. government (USG) is authorized to borrow in order to meet all previously existing legal obligations. Importantly, the debt ceiling does not authorize new spending commitments. The limit is set by law, which means any changes must be approved by both chambers of Congress and the White House. The current limit is $31.4 trillion.

USG legal obligations include a variety of payments that may impact you and your business directly or indirectly. These include everything from individual tax refunds to interest payments on the national debt (i.e., bond obligations). Government contractors, USG employees (the federal government is the largest single employer in the country) and military salaries are included in this list. As are the nation’s government services, which consist of everything from infrastructure spending and defense preparedness to safety net programs like Social Security, Medicaid, Medicare and Veterans’ benefits.

Extraordinary Measures & the “X-Date” (top)

On January 19, 2023, the U.S. Department of the Treasury (Treasury) hit the $31.4 trillion debt limit. To avoid default and preserve its ability to make essential payments, Treasury had to move away from traditional borrowing authority and begin operating under “extraordinary measures.” Established by law, these are a series of actions meant to prolong the date by which Congress must address the debt limit. It may be helpful to think of extraordinary measures as managing cash flow when resources are tight, e.g., waiting to pay bills until other income has been received.

Extraordinary measures are only temporary. Because Treasury is now dependent on expected cash receipts, the exact date of default (or “X-Date”) will be the day when Treasury has exhausted its extraordinary measures, cash on hand, and total outgoing payments. This can only be estimated and is subject to change. To the point, analysts initially expected the X-Date to be sometime in late August. However, April tax receipts failed to meet expectations. 

On Monday May 1, 2023, Secretary Yellen notified Congress that the timeline for default has accelerated to June 1, 2023 or sooner. The clock is now ticking, even faster, for Congress and the White House to craft a solution before the nation defaults on its debt.

What Happens if the U.S. defaults? (top)

The short answer is that no one knows for certain, but it would not be insignificant. In addition to the USG failing to meet existing legal obligations, a default could trigger a global economic crisis. The U.S. has never defaulted before, but it came close in 2011.1 As those negotiations came down to the wire, markets began to react. The U.S. credit rating was downgraded from AAA to AA, resulting in an additional $1 billion in interest fees to the American taxpayer. The near default also caused ripples in global financial markets. According to research by the Bipartisan Policy Center, a similar pattern is beginning to emerge.

Since World War II, the U.S. dollar and credit have been considered the safest in the world, even during times of extreme economic strain. No one knows what would happen if that changed.  Adding to the complexity, the U.S. and global economies are still vulnerable following pandemic disruptions and inflation pressures. Many fear the current brinkmanship alone could trigger another recession.

Federal workers have also begun to wonder what a default could mean. While the U.S. has endured federal shutdowns, a default is not the same thing. A government shutdown occurs when federal agencies lack budget authority to operate. In the case of default, federal employees would likely be required to continue working without pay, and agencies would still have legal authority to obligate funds. However, Treasury may have to delay or entirely miss payments to individuals and businesses.2

Movement on Capitol Hill (top)

In the last week of April 2023, House Republicans passed legislation that would raise the debt ceiling by $1.5 trillion or until March 31, 2024 (whichever comes first). In return, the GOP proposal would set discretionary spending levels for the next year at FY2022 limits and restrict spending growth. The net effect would be to cut approximately 20% of domestic discretionary spending.

Unsurprisingly, the Democratic-controlled Senate and White House balked at this opening salvo – instead arguing for a clean debt limit increase, which is also an unlikely outcome. In years past, both parties have been guilty of using the debt ceiling to force negotiated policy changes. Complicating political calculus, leadership in both the House and the Senate are operating with razor thin margins and an eye toward the 2024 elections.

What’s Next? (top)

Upon news of the expedited X-Date, President Biden invited Speaker McCarthy and Leader Schumer to engage in meaningful debate at the White House on May 9, 2023. While no one knows how it will play out for certain, there will have to be some kind of compromise from all sides on a deal, which will likely include some kind of debt ceiling extension and federal spending cuts.

Possible outcomes include:

  • A clean short-term extension while negotiations over spending cuts progress.
  • A short-term extension with discretionary cuts and/or spending limits while longer term solutions are negotiated.
  • A broader package with elements from the “Limit, Save, Grow” bill passed by the House and an extension into the next Congress. This could include a mix of discretionary spending cuts, reallocation of unspent COVID or other programmatic funds, and spending limits. Notably, the House-passed bill does not have the votes in the Senate in its current form. Some have suggested a proposal modeled on the Budget Control Act of 2011, which led to sequestration and broad cuts to federal agencies and contractors across the board.
  • A “non-leadership” agreement – various caucuses and bipartisan groups in Congress have begun releasing their own solutions. Notably, it would be a challenge to bring up anything in the House or Senate without leadership support.

As the X-date draws nearer, details will begin to emerge and entire sectors may be caught in the crossfire. To better understand how the debt-ceiling negotiations and related fallout may impact you, your business or the funding streams on which you rely, contact Buchanan’s Federal Government Relations team.

  1. Note: There have been only three episodes in the federal government’s fiscal history when its public credit has been even questioned.
  2. See the Brookings Article, “What’s the difference between a government shutdown and a failure to raise the debt ceiling?”, April 24, 2023.