Time is rapidly running out to raise the debt ceiling, and the next week could be critical for House Republicans and the Biden Administration to strike a deal.
The Treasury Department has set a June 1 “X date” to reach an agreement. If no deal is struck by then, the U.S. may not have enough money to meet its obligations, risking a technical default and potentially triggering a financial crisis.
President Joe Biden is scheduled to meet with the leaders of the House and Senate on Tuesday to discuss the debt. The meeting will represent something of a starting point for formal negotiations between the two parties, but the chance of an agreement coming quickly is off the table: The White House continues to say the president won’t negotiate over the debt ceiling during the meeting, though he will engage in a “separate conversation” about spending and the budget.
After that meeting, the window for a deal to make it through Congress will narrow sharply. The only days that Congress and Biden will be in Washington before the deadline will be May 9 to 17. Biden then departs for a Group of 7 summit in Japan, though work could continue while the president travels abroad.
“Now that we are within one month until hitting the X-date, both sides recognize that the time for posturing is over,” says Brian Riedl, a former chief economist to Sen. Rob Portman (R.-Ohio), now a senior fellow with the Manhattan Institute. “Any deal really needs to be negotiated by the middle of the month to get time to draft the deal, pass it and implement it before we hit the debt limit.”
A failure to act by the June 1 X-date could send the stock market into a spiral, drag down economic growth, and throw millions of Americans out of work in a near-immediate recession.
Stocks rallied Friday and have been trading in a relatively narrow range. But spikes in some Treasury yields, including short-term bills recently auctioned, indicate that the bond market is getting nervous.
History suggests the brinkmanship will result in a deal. Congress has voted on the debt limit and successfully avoided default 78 times since 1960, according to the Treasury Department.
But this fight looks more politically fraught. The most recent comparison is the 2011 battle, during which negotiations between a newly minted GOP House majority and President Barack Obama were drawn-out for so long that Standard & Poor’s downgraded the U.S.’s credit rating from AAA status to AA+, even though the debt limit was never breached.
The politics of 2023 look tougher. Republicans hold a razor-thin, four-vote majority in the House. The party’s right-wing, which was critical to House Speaker Kevin McCarthy (R.-Calif.) winning the leadership post, could defeat a bill supported by moderates. McCarthy also needs a majority of his party on board to avoid a challenge to his leadership. If a deal tilts too far to the right, it is all but doomed in the Democratic-controlled Senate.
In 2011, both sides were at least in agreement that they wanted to discuss finding a way to reduce the deficit. This year, Biden has said repeatedly he won’t negotiate over the debt ceiling because he believes Congress should act without conditions to avoid default. He has said he will engage with Republicans over government spending and appropriations.
“I never thought, in 2011, we’d go over the cliff,” says Riedl, who worked in the Senate at the time. “I’m not sure that’s the case this time.”
The debt and budget math are more challenging now, says Chris Krueger, managing director of the Cowen Washington Research Group. The federal debt has more than doubled since 2011 to $31.5 trillion, he notes, and the debt-to-GDP ratio is now well above 100%.
“By any measurable metric,” Krueger says, “this is a far tougher setup.”
There are ways for both sides to claim victory, along with other ideas floating around. If they can agree on only a modest increase in spending or to keep funding levels steady, then GOP lawmakers could celebrate, Riedl says. Democrats could also sell that kind of deal to constituents, claiming they avoided cutting funds for popular programs such as veterans benefits or clean energy tax credits passed last year.
Lawmakers might also agree on some issues, such as clawing back unspent Covid relief money or reforming energy permitting as part of a package.
If a broader deal appears to be out of reach before the June 1 deadline, Congress could vote to suspend the debt ceiling temporarily, likely until the end of September, when a budget bill will have to pass or the government will shut down. Debt-ceiling talks could then become part of broader budget negotiations.
“You can see the contours of the deal quite easily—it’s just a question of political cover,” says Libby Cantrill, a managing director with PIMCO. “It’s trying to make two mutually exclusive things true at the same time, but it’s Washington. I think they can probably do it.”
One other optimist expecting a deal is Berkshire Hathaway (BRK.B) CEO Warren Buffett. “Although there may be a debt ceiling, it’s going to get changed,” he said Saturday at Berkshire’s annual shareholder meeting.
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