A standoff is brewing in the US Congress as both parties are set to a showdown over raising the US borrowing cap. If it is not raised, the US risks defaulting on its debts and sparking a full-blown economic crisis, according to some economists.
However, the debt ceiling has long been a contentious issue between Republicans and Democrats. Republicans often attempt to tie a raise to spending cuts, something Democrats loathe to do.
Already, Speaker Kevin McCarthy has signalled House Republicans would seek to use the brewing standoff to cut spending and reduce the debt.
“One of the greatest threats we have to this nation is our debt,” McCarthy told Fox News, adding, “We don’t want to just have this runaway spending.”
He said that lawmakers likely had until midsummer until the US runs out of cash, something known as an X-date.
Treasury Secretary Janet Yellen warned that the borrowing limit would likely be reached on Thursday, January 19. The Treasury will then take “extraordinary measures” to ensure that the United States meets its debt obligations.
She said: “Failure to meet the government’s obligations would cause irreparable harm to the US economy, the livelihoods of all Americans and global financial stability.”
Republicans are drafting an emergency plan for breaching the debt limit which would see the Treasury prioritise certain payments over others, according to the Wall Street Journal.
The standoff looks to be at least as severe as a 2011 battle over the debt ceiling which saw America’s credit rating briefly downgraded and forced domestic and military spending cuts.
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However, six months can be the blink of an eye in legislative time and any protracted debate would likely see brinkmanship close to the deadline.
In 2011, a bill to raise the ceiling was passed on August 2, the day that the federal government said it would run out of money (although other economists claimed it could carry on meeting its debts for a short time).
Stock markets plunged and market volatility was up ahead of that 2011 deadline. Markets did not return to normal for around six months.
In 2021, the Democrat-controlled Congress voted to raise the debt limit to about $31.4 trillion.
