After weeks of tense negotiations, the U.S. Senate will delay a much-feared national debt default raising the nation’s credit limit (“debt ceiling”) by $480 billion. The move ensures that the U.S. will not – for now, at least– default on its payment obligations, undermine the financial system, or trigger a global recession. However, the deal is not a long-term solution, and instead sets up an even riskier “fiscal cliff” on or around December 3.
As explained here, the “debt ceiling” is the maximum amount of debt the federal government can accrue. Congress has feuded, but never allowed a default, on the debt ceiling regularly since the 1950s. The U.S.’s debt includes the federal government’s daily obligations like Social Security payments, veterans’ benefits, federal employees’ and active-duty servicemembers’ pay, payments on federal contracts, and more. Defaulting on those obligations would trigger widespread economic hardship for working people. Furthermore, U.S. Treasury bonds are a central underpinning of many Americans’ retirement and investments, not to mention the global financial system, meaning default could trigger a worldwide financial crisis and recession.
Congress last suspended the debt ceiling in 2019, but the limit came back into effect in August at about $28.4 trillion after both chambers’ Democratic leaders decided to delay passing another suspension or increase. This inaction forced the Treasury Department to use “extraordinary measures” to keep up the nation’s payments in recent months, with even those measures set to fail on or around October 18.
The approaching deadline triggered a standoff and high-stakes procedural debate. Raising the debt ceiling requires a simple majority in the House. However, in the Senate, the minority party (currently Republicans) can filibuster vehicles like the debt ceiling to require at least 60 votes for advancement. Senate Minority Leader Mitch McConnell (R-KY) announced early on that Senate Republicans would filibuster to block a debt ceiling increase despite the economic stakes. Senate Democrats explored several alternatives, including permanently changing the rules of the Senate to eliminate the minority party’s power to filibuster a debt ceiling increase.
Under threat of his party permanently losing procedural power, McConnell this week offered a compromise. In legislation that could see a vote in the Senate today (October 7), congressional leaders have a plan to increase the debt limit to accommodate estimated expenditures through December 3, the same deadline as the previously passed Continuing Resolution that provided funds that avoided a potential government shutdown. Minority Leader McConnell insists this deal is to allow Democrats additional time to use filibuster-proof budget reconciliation to raise the debt ceiling along party lines. However, several conservative Republicans believe that McConnell folded Democratic and business’ political pressure.
Democrats will need help from at least 10 Republican senators to pass the deal proposed by Minority Leader McConnell. Without objections from frustrated GOP senators, the bill could be approved and delivered to the House on Thursday. With objections, however, final passage could be extended into the weekend.
It is important to note this is not a solution; merely a delay mechanism to push back a much feared “fiscal cliff,” combining a debt ceiling default AND a federal shutdown, by about two months.
Without a deal, the Treasury Department estimates the US government will run out of cash by October 18. MBS will continue to monitor the status of the bipartisan deal and provide updates as new developments materialize.