U.S. Government Reaches Debt Limit: Current Landscape and Key TakeawaysJanuary 30, 2023
BROWNSTEIN CLIENT ALERT, JAN. 20, 2023
On Jan. 19, 2023, the United States government reached its $31.4 trillion borrowing limit, which was signed into law (P.L. 117-73) by President Joe Biden on Dec. 16, 2021. Last week, Treasury Secretary Janet Yellen wrote to congressional leadership notifying them of the impending issue. Yellen noted that once the limit is reached, the Treasury Department will need to take “certain extraordinary measures” to prevent a default on its obligations. However, the Treasury Department estimates that these measures may only carry the government through early June.
Once the federal government exhausts all available extraordinary measures, it loses its ability to fund its operations beyond its incoming revenues, which only cover part of what is required. As a result, the federal government would have to at least temporarily default on many of its obligations, including Medicare and Social Security payments, military salaries, interest on the national debt, tax refunds, among others. Absent raising or suspending the debt limit, the Treasury Department would be in uncharted territory, with no official playbook on further action. Absent congressional action, the Treasury Department does have the authority to do one of two things: (1) prioritize certain obligations over others; or (2) wait until it has enough revenue to cover a full day’s worth of obligations and then make all payments at once. Both situations are untested and would bring both legal and operational challenges.
While a default will not result in a government shutdown, the consequences are more serious and have long-term implications. Yellen cautioned that even the threat that the U.S. may not be able to meet its obligations could cause irreparable harm, citing the 2011 debt limit crisis, which led to the only credit rating downgrade in U.S. history. A default would also trigger a crisis of confidence in the U.S. dollar and Treasury bonds and shock global financial markets. It would cause interest rates across the country to soar, affecting car loans, credit cards, home mortgages, among other costs of borrowing and investment.
At this time, raising the debt limit remains a partisan and politically charged issue. In order to secure the speakership, Kevin McCarthy (R-CA) had to make several assurances to Freedom Caucus holdouts. This included changes to the House rules package, some of which will now affect the negotiations around raising the debt limit. Specifically, the new House rules eliminate the “Gephardt rule” that allowed the House to automatically send a measure extending the debt limit to the Senate when it adopts a budget resolution. Additionally, House rules establish a “Cut-As-You-Go” (CUTGO) rule that requires offsets if bills increase mandatory spending within a five-year or 10-year budget window. In her letter to Congress, Yellen reminded leadership that increasing or suspending the debt limit does “not authorize new spending commitments or cost taxpayers money” and therefore does not run afoul of new House rules. However, House Republicans have made clear that they view negotiations around raising the debt limit as an inflection point to secure spending cuts. Speaker McCarthy specifically called for Democrats to negotiate a fiscal plan that includes an increase in the debt limit.
Despite Speaker McCarthy’s calls for Democrats to negotiate the terms of a debt limit increase, there is still no specific set of demands or a consensus position within the party. Across the board, Republicans have largely supported implementing discretionary spending caps similar to what Congress did in 2011 through the Budget Control Act (BCA). Republicans are looking to negotiate reforms to Social Security and Medicare that improve their long-term solvency as the combined Social Security trust funds are expected to be insolvent by 2035 and the Medicare Hospital Insurance trust fund is expected to be insolvent by 2028. This would likely face swift backlash from a Democratic-controlled Senate and a Biden White House who have been adamant about protecting entitlement programs. Additionally, some conservative House members are pushing for a payment prioritization plan, which would call on the Biden administration to make only the most critical federal payments if the Treasury Department comes up against the statutory limit on what it can legally borrow. However, it is still uncertain what Speaker McCarthy could bring to the negotiating table that would satisfy both rank-and-file Republicans as well as the conservative flank and could pass muster with Senate Democrats and the Biden administration.
Last week, White House Press Secretary Karine Jean-Pierre drew a line in the sand on the debt limit, saying that the White House will not negotiate or offer concessions to Republicans and called for a clean debt limit increase. Given this partisan gridlock, it is not likely that Congress will act on the debt limit until the threat of default looms closer, likely in late May or early June.
Similarly, congressional Democrats argue that spending cuts should be negotiated as part of the annual budget and appropriations process, not during debt limit discussions. Senate Majority Leader Chuck Schumer (D-NY) and House Minority Leader Hakeem Jeffries (D-NY) issued a statement late last week saying that Democrats want to move quickly to pass legislation addressing the debt limit to prevent any risk of a default. However, Sen. Joe Manchin (D-WV) broke with Democrats in an interview this week saying that he wants to do something bipartisan on the debt limit that would help improve the nation’s debt trajectory. Specifically, he said he and Speaker McCarthy have briefly discussed Sen. Mitt Romney’s (R-UT) Time to Rescue United States’ Trusts (TRUST) Act, which would create a “rescue committee” with the mandate to draft legislation that extends the long-term solvency of endangered trust funds.
If both parties cannot come to the negotiating table, Democrats could attempt to recruit some House Republicans to work around Speaker McCarthy and authorize a clean increase to the debt limit through a lengthy and rarely used parliamentary procedure known as a discharge petition. Any member can initiate a discharge petition so long as the bill has been referred to committee for at least 30 legislative days. The bill would then need to garner 218 House signatures to dislodge it from committee, meaning at least six Republicans in addition to all Democrats must sign it. Finally, it then must sit on the calendar for at least seven legislative days before the originating member can force the speaker to hold a vote within two legislative days.
This process is politically fraught for Republicans because if they side against Speaker McCarthy, they could risk losing committee assignments or facing a primary challenger. On the other hand, if Speaker McCarthy gives any indication that members have the green light to sign on to such a motion, Freedom Caucus members could bring a motion to vacate and oust McCarthy from the speaker’s chair. Moderate Rep. Brian Fitzpatrick (R-PA) has said Republicans and Democrats are “very much so” discussing the possibility of a discharge petition, but that it would be “an absolute last resort.” Many Republicans are treading lightly, with Rep. Dusty Johnson (R-SD), chair of the centrist Republican Main Street Caucus, saying it is “way too premature” to seriously consider a discharge petition.
As negotiations have yet to begin in earnest, the current stalemate over the debt limit is likely to last the next several months up until the Treasury Department’s “extraordinary measures” run dry. While it is still uncertain how Congress will move forward on the debt limit, it will certainly be a critical political battle for both parties.