ALEX BRUMMER: The USA’s looming debt crisis

President Biden has received a lot of credit in recent times for his big spending – aimed at transforming the US economy.

Admirers have gone so far as to suggest that the fiscal generosity, approved when Democrats had a majority in the House of Representatives, made him the natural successor to former “great government” Democrats Franklin D Roosevelt and Lyndon B Johnson, authors of the New Deal and the Big Society respectively.

Biden spends money like there’s no tomorrow. His administration canceled $400 billion in student debt, passed a $1 trillion infrastructure renewal bill, and an “Inflation Reduction Act” that spends $397 billion on climate change projects (much to the consternation of the UK and the EU).

He ended 2022 with a boom in the form of a $1.7 trillion bill.

Republicans backed a package that included a massive increase in defense spending and billions in aid to Ukraine.

Crisis time has arrived for the US as largely unfunded spending reaches the debt ceiling.

Technically, the US hit the $31.4 trillion borrowing limit yesterday. To avert a debt crisis or potential bankruptcy, US Treasury Secretary Janet Yellen will have to hit the emergency button to postpone a series of programs.

With the budget deficit at 120 percent of US output, the third highest in the G7 after Japan and Italy, the impending crisis is impacting the dollar. It’s one of the reasons sterling has recently staged a revival.

London spectators may be able to muster a wry smile. Yellen was one of Trussonomics’ most outspoken critics last September, contributing to the chaos in the market.

Yet, at 97 percent, UK debt-to-GDP is relatively less threatening.

The difficulty for Biden, the US Treasury Department and global markets is that the shift of control in Congress that landed California Republican Kevin McCarthy in the Speaker’s Chair means that fiscal policy is now in hostile hands.

The results of the November midterm elections were seen as a win for Biden and the Democrats as Trump-style populism was rolled back. Maybe, but a more sustainable legacy can be a budget stalemate.

Fiscal conservative Republicans, the broad equivalents of Rishi Sunak and Jeremy Hunt, want to halt the big spending spree and are determined enough to force a confrontation when push comes to shove.

Yellen has identified some $428 billion in temporary savings, such as suspending some payments to the state pension funds. Imagine how well that could go down in Whitehall!

She could also prioritize debt service, but then the Pentagon would have to whistle for money amid a major war in Europe and a strategic chess game in the South China Sea.

Such measures could allow the US Treasury Department to pay its bills through June.

Some forecasters believe that with clever accounting, Yellen could delay the trigger point until the fall. Debt patrols and having to send home federal workers for lack of authority to pay are not uncommon in Washington.

The big concern is that politics on Capitol Hill is so raw and divisive that it could be 2011 again, when the country came to the brink of default.

Standard & Poor’s downgraded the US credit rating by a notch and, just as importantly – from an investor’s point of view – the S&P index fell 15 percent, while the shares of companies most exposed to US government spending fell 25 percent.

BAE Systems, which makes a ton of money from the US Department of Defense and other UK companies with US aerospace exposure, such as Melrose-owned GKN Aerospace, could potentially find themselves in the secondary line of fire.

It is not in the interest of Congress, the US government or the global economy to allow a default.

In Davos, the IMF reaffirmed this week that world production is weak and expects growth to slow in 2023 from 3.2 percent last year to 2.7 percent.

As seen at the time of McCarthy’s election, which required a record 15 votes over four days, Capitol Hill is divided.

Unruly right-wing legislators have been called up by the president to chair committees. Tough times lie ahead as the US grapples with Biden’s mountain of debt.