Where do things stand as the US rolls back debt ceiling deadline?

United States Treasury Secretary Janet Yellen has said the government will run out of money to meet its financial obligations by June 5 if the current spending limit of $31.4 trillion is not raised before then.

Yellen’s announcement, which came in the form of a letter to the U.S. Congress on Friday, the deadline for a potential default is pushed back from an earlier estimate that the Treasury could run out of cash as early as June 1.

“During the week of June 5, Treasury will make an estimated $92 billion in payments and transfers,” including a quarterly adjustment of nearly $36 billion in Social Security and Medicare trust funds, Yellen wrote in the letter.

“Therefore, our planned resources would be insufficient to meet all these obligations,” she said.

The extended deadline gives lawmakers more breathing room as they try to reach agreement on raising the US spending cap.

Congress is tasked with raising the country’s debt ceiling, and Republican lawmakers have used their majority in the U.S. House of Representatives as leverage to demand cuts to social programs in exchange for raising the ceiling, as a default on the horizon looms.

Where are things?

In recent weeks, Republican House Majority Leader Kevin McCarthy has held talks with President Joe Biden’s administration to reach a settlement and avoid default, which experts say could have devastating consequences for the US and the global economy .

Earlier on Friday, McCarthy said negotiators were working to “finish the job” but did not know if a deal would be reached within 24 hours.

The two sides are eyeing an agreement that would raise the debt ceiling for two years — beyond the next presidential election — by cutting spending for 2024 and imposing a 1 percent cap on spending growth for 2025.

It’s not clear whether the relaxed deadline will give lawmakers room to iron out the final details or whether conservatives will dig their heels in and use the extra time to push for bigger concessions and cuts. Most legislators left for Memorial Day weekend but have been warned to report to Washington, D.C. to vote on a deal if there is one.

According to the Treasury Department, the debt ceiling has been raised 78 times since 1960 — 49 times under Republican presidents and 29 times under Democratic presidents.

What does each party want?

Republicans have pushed for tougher demands on benefits such as food aid and health care for low-income recipients — whose party wants jobs — and say the country needs to cut its spending levels.

Democrats have opposed the new job requirements for benefits programs and have been quick to point out that during former President Donald Trump’s administration, Republicans seemed unconcerned about raising spending limits.

On Thursday, news outlets reported that McCarthy and Biden were approaching a deal that would reportedly include increased military spending, reclaim unused COVID-19 relief funds currently earmarked for things like disaster relief and vaccine research, and cut funding for the Internal Revenue Service. (IRS).

Most importantly, the deal reportedly would include caps on non-military discretionary spending on things like housing, education, road safety and other federal programs.

While a spending cap would likely serve as a de facto cut to social safety net programs, given rising inflation, such a deal would probably appeal more to Democrats than the hefty cuts previously proposed by Republicans.

What happens if the US fails to meet the deadline?

The risks of default are also significant, with Yellen previously warning that default would be an “economic and financial catastrophe” that would “forever raise the cost of borrowing.”

Some rating agencies have warned they could downgrade US credits, driving up borrowing costs and undermining the country’s global standing.

When Republicans also pushed for spending cuts in exchange for raising the debt ceiling in 2011 — and led to a temporary suspension of many government services — the Government Accountability Office found that the delayed ceiling increase cost the U.S. about $1.3 billion in one year. at higher financing costs. .

A recent analysis by Brookings, a US think tank, found that the lower borrowing rates currently enjoying the government will save it some $50 billion next year and more than $750 billion over the next 10 years. The analysis states that if “some of this benefit were lost by binding the debt limit, the cost to taxpayers could be significant”.

Another report from economic analysis group Moody’s also found that failing to reach a deal before the deadline could lead to a 1.6 percent rise in unemployment, even if the ceiling were raised soon after.

The question of what effect a default would have on government services and what payments the Treasury would prioritize also remains an open question.

A deal was reached in 2011, just two days before the Treasury estimated it would run out of money to meet its financial obligations.

At the time, the Treasury planned to prioritize interest and principal payments, with potential delays to other obligations such as pension benefits, health care and military pay.

The Biden administration did not clarify which payments it would prioritize in the event of a default.

However, recent reporting by National Public Radio in the US showed that $12 billion in veterans’ benefits and $47 billion in Medicare providers are due as of June 1, $25 billion in Social Security benefits as of June 2, and $4 billion in federal salaries. on June 9.

If a payment default were to occur, those payments could not be made.

“The failure of Congress to raise the debt limit would cause severe hardship for American families, damage our global leadership position and raise questions about our ability to defend our national security interests,” Yellen’s letter reads. “I continue to urge Congress to protect the full faith and honor of the United States by acting as quickly as possible.”