President Joe Biden and House Speaker Kevin McCarthy failed on Monday to agree on the terms of a much needed deal between the White House and the Republicans for avoiding the looming government shutdown.
If the two sides do not reach common ground within ten days to raise the current debt ceiling, the US government will effectively shut down, triggering a serious economic crisis. The US treasury cannot borrow any more funds as it has reached the $31.4 trillion debt ceiling, and the Congress should raise the ceiling to help the government borrow funds and keep functioning.
How the Government Defaults
When the government hits the debt ceiling, it cannot spend more unless the limit is enhanced or suspended. Technically, the limit prevents the Treasury Department to issue more Treasury bonds to bring in money. At this point it will have a tough choice - either to stop paying federal employee salaries and social security payments or stop paying the interest on the national debt. Both choices are tough and if the government is forced to keep spending on salaries and benefits, it will fail to pay interest on national debt, leading to a default.
4. What is Current Debt Limit?
Following the last enhancement of the limit, the current US government debt limit stands at $31.4 trillion. In August 2021, when the government stared at a shut down, the debt limit was $28.4 trillion. Congress enhanced the limit on December 14, 2021 to around $31.4 trillion. It was projected at that time that the limit would be breached sometime in 2023.
Root of the Conflict
At the root of the crisis is the Biden administration's refusal to agree to crucial pending cuts that the Republican Congress leadership wants in lieu of raising the debt limit. Though both the sides believe a US default will be detrimental for the world economy, they were not able to strike a deal.
"We reiterated once again that default is off the table and the only way to move forward is in good faith toward a bipartisan agreement," Biden said after the meeting, Reuters reported.
McCarthy also stressed that the GoP leadership will continue the talks until they find common ground. "I believe we can still get there," the House Speaker said. He said the Republicans do not accept Biden's plan to raise taxes on the wealthy in order to retain the spending at its current levels. The GoP refuses to accept this plan, and wants to slash the 2024 federal budget.
US Has Never Defaulted
The US government has never defaulted in its interest in payment commitments. According to Treasury Secretary Janet Yellen, a US default could happen on June 1 if the Congress does not reach a deal by then to raise the top limits for the government's borrowing. However, according to a nonpartisan Congressional Budget Office forecast, the limit will be breached only on June 15.
Why Time is Crucial
It is important for the warring sides to arrive at a deal as soon as possible. The government shutdown is a good ten days away, but the legislative process to raise the debt ceiling is long, making it imperative that the Democrats and the Republicans arrive at a decision at the earliest. The possibility of a debt default had loomed several times in the past, but each time the it was averted at the last minute with the Congressional leadership arriving at a decision to raise the limit.
