June deadline coming up, Senators to block vote on raising US debt ceiling
AL BAWABA – United States (US) Republican senators declared that they may block any bill that would aim to raise the US debt ceiling without tackling other "priorities," according to Reuters.
A bloc of 43 Republicans in the upper chamber of Congress, the US Senate, stated in a letter to Democratic Senate Majority Leader Chuck Schumer that they oppose voting on any such proposal.
In the statement carried by Reuters, the senator bloc cited an economy "in free fall." It highlighted the importance of "substantive spending and budget reforms."
The statement also said that these reforms should be the "starting point" of any negotiations or discussions moving forward.
The US government hit the borrowing cap in January this year, at $31.4 trillion.
Earlier, the House of Representatives passed a bill to raise the US debt ceiling, Reuters reported. It noted that the house is led by the Republican Party.
The bill passed in April by the House proposed slashing tax incentives for solar energy and a 22 percent cut in spending - $4.5 trillion; these are some of the priorities Republican senators are pushing for.
In exchange, the bill would allow for a $1.5 trillion increase in the US debt limit.
However, a bill that does not tackle these “priorities” will not be put to a vote in the Senate, according to the Republican Senators bloc.
So far, the amounts payable on June 1 do not seem to have been announced as of yet.
This is not the first time the United States has engaged in policy battles over the US debt ceiling or struggles with concerned about the government’s inability to pay its debts or bills.
The US debt ceiling has been raised, extended or adjusted 78 times since 1960, most recently in 2011.
Repercussions of the current US debt ceiling
Nonetheless, according to Treasury Secretary Janet Yellen, failing to lift or suspend the US debt ceiling would lead to "economic and financial catastrophe."
Without it, the US would be unable to pay its bills.
The economic outlook of the US. is already clouded by rising inflation, climbing interest rates and unease in the banking industry, CNBC News reported.
More so, the Congressional Budget Office and the Treasury Department both highlighted the vitality of making the debt payments on time for the US.
In fact, if the US government doesn’t pay its bills for even a week, 500,000 Americans would lose their jobs, and that the economy will contract by 0.6 percent, the budget office and treasury projected on May 3.
Dragging any such scenario longer than three months, CNBC News highlighted, would trigger a “Great Recession” that would cost some 8.3 million people their jobs.
Either way, the ceiling would be breached by June 1, with or without the debt ceiling adjustment the White House is pushing for.
The difference is that should the debt ceiling be adjusted or suspended, the US government would be able to borrow the money it needs to make the necessary payments, scheduled for June 1.
If not, the government will not be able to borrow the money needed to pay the bills owed to thousands of American companies, contractors, beneficiaries and others, including creditors.
As a result, hundreds of thousands of workers in US will lose their jobs and the economy will suffer a severe blow.
The costs of a payment default
Additionally, the stock market would fall by around 45 percent, which would devastate retirement savings.
In the wake of such a crash, employees in the United States would be crushed by higher interest rates, and mortgages would rise higher, having already increased more than 3 percent.
In December 2021, mortgage rates stood at 3 percent in the US, and has since increased to 6.4 percent as of this month, May, 2023.
Additionally, Moody’s predicted a $12 trillion loss in household wealth.
According to Federal Reserve Chair Jerome Powell, should the United States fail to meet its June 1 deadline, the entire economy – and the policymakers alike – would be “in uncharted territories”.
“The consequences to the US economy would be highly uncertain and could be quite averse,” America’s top economic policymaker said on May 4.
If anything, failing to pay the bills would erode trust in US debt, seen up to date as largely “risk-free” due to the nation’s track record of paying its debts on time and in full, economists argued.
A default could also lead to a dramatic decline in the value of US government bills, notes and bonds, CNBC explains.
Third Way, a Washington, D.C.–based public policy think tank founded in 2005, estimates that a single default, such as failing to make the June 1 deadline, could add $130,000 to the cost of an average 30-year mortgage.
In fact, just fear of the US missing the deadline could ravage the economy.
In 2011, credit ratings agency Standard and Poor (S&P) downgraded the United States’ credit rating, from AAA to AA+.
This, in and of itself, sans the turmoil, raised borrowing costs for the US government by $1.3 billion, according to CNBC.
According to the Congressional Budget Office’s "Budget and Economic Outlook: 2023 to 2033" report, published in February 2023, the US debt-to-Gross Domestic Product (GDP) is projected to hit 195 percent in 2053.
Currently, America’s Deb-to-GDP ratio stands at 98 percent, whereas the ratio in 1945 stood at 104 percent.
Why and what’s next?
A Peter G. Peterson Foundation report shows that many issues may have contributed to the current US debt situation.
Chief among such factors is the high health care costs, the ageing population, and the inadequate tax and public revenue system, the foundation contests.
According to the budget office’s Historical Budget Data, the state collected $4.89 trillion and spent $6.27 trillion in 2022, with the highest expense cited by the foundation being health care.
"No one should assume that the Fed can protect the economy and financial system and our reputation from the damage that such an event [as defaulting on a payment] might inflict," Powell exclaimed.
Economists at the Brookings Institution, a Washington think-tank, cautioned in a recent report that even a short-lived impasse would lead to "sustained — and completely avoidable — damage," the Financial Times reported.
Brookings Institution economists Wendy Edelberg and Louise Sheiner told the times that the extent of the damage would depend on how the government chooses to prioritize its payments.