Debt Ceiling: What's Next?
May 8, 2023
Last week, Treasury Secretary Janet Yellen informed Congressional leaders the government could default on its debt as soon as June 1st. While there may be some wiggle room past June 1, most agree that it is not more than a few weeks. This announcement caused Democrats and Republicans to ramp up activity around the debt limit.
Tomorrow, President Joe Biden (D) and Speaker Kevin McCarthy (R-CA) will sit down to discuss the debt ceiling increase.
State of Play:
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President Biden continues to call for a clean debt ceiling that is not tied to any spending cuts. While he has invited Congressional leadership to the White House to discuss the debt ceiling, we don’t anticipate any breakthroughs during this meeting. It is the first step in reopening lines of communication.
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Speaker McCarthy was able to pass the Limit, Save, Grow Act (LSG Act) through the House by 217-215, which would raise the debt ceiling until March 31, 2024, and cap federal spending, among other things. With the passage of the LSG Act, House Republicans maintain that they have passed a bill to raise the debt limit responsibly and the ball is now in the President’s court.
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House Democrats remain largely united behind Biden and the demand for a clean debt limit bill. Two hundred House Democrats sent a letter to Speaker McCarthy calling for him to move a clean bill. Additionally, House Democratic Leadership announced that they would move forward with a discharge petition in the House, which would permit the consideration of a clean debt limit increase. The discharge petition needs 218 signatures to force a vote in the House (currently there are 213 Democrats) and there are numerous procedural hurdles the discharge petition would need to overcome.
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Senate Democrats remain largely united in their support for a clean debt limit bill. The notable exception is Senator Manchin who has called for the President and the Speaker to negotiate a deal. Leader Schumer took procedural steps to line up votes on the House LSG Act as well as a clean debt limit bill. It is unclear if and when Schumer would schedule those votes, but neither is likely to have support from the requisite 60 or more Senators (at least for now).
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Senate Republicans are following Speaker McCarthy’s lead. There is no “gang” of Senate moderates working on a plan. Most, if not all, Republicans will continue to support the House bill even if they disagree with some pieces of it.
What Happens Now? There are several ways this debate could play out, but it is likely to end after someone blinks, bringing the political brinkmanship to an end. It is expected to end in one of three scenarios:
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Short-term debt limit punt. Under this scenario, Congress would pass a short-term debt limit patch that could line up the debt limit breach with the end of the fiscal year (9/30/23). Congress would then need to negotiate a spending deal and a debt limit deal or face a “fiscal cliff” of debt default and shuttering the federal government.
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A bipartisan deal. The President and House Republicans could coalesce around a deal that would look different from the House LSG Act. It would include spending caps, rescission of COVID funds, energy permitting reform, and some work requirements. We do not believe repealing provisions of the IRA will be included.
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Clean debt limit increase. If the politics of the debt limit become too toxic for Republicans, a sufficient number of moderates could cross party lines to support a clean debt limit increase. The discharge petition we noted above could come into play under this scenario.
What if a deal isn’t reached? While highly unlikely but possible, Congress and the Biden Administration fail to reach a deal for a prolonged period of time. According to analysts at Moody’s, “the blow to the economy would be cataclysmic.” However, we could envision a scenario where a short-term default is necessary to force action on a final deal.
Wild Cards: In April, the Problem Solver’s Caucus released a bipartisan plan to raise the debt limit coupled with budget process reforms and a fiscal commission. This idea is modeled after the “super committee” formed in 2011. Some Republicans have offered creative solutions to the debt limit but Democrats call them risky gimmicks.
Our thought bubble: Unfortunately, only time will tell. We’ll watch to see what comes from tomorrow’s meeting between Biden and Congressional leaders.
If you have any questions, contact Chelsea Neil at cneil@crefc.org or David McCarthy at dmccarthy@crefc.org.