In the US, lawmakers will continue negotiations on the debt ceiling, the maximum amount the federal government can borrow to cover spending obligations. Periodically, the ceiling is lifted because the spending obligations are greater than the money received from taxes.
Historically, the debt ceiling debate has come and gone without any fuss, but with a divided Congress (Republicans control the House, while Democrats control the Senate and the White House) and a hostile political environment, the debate, and potential fallout, is starting to flow into financial markets with fears a default on the government’s debt is a possibility.
Although the probability of a default is unlikely (it has never happened before) the consequences are far-reaching. A default would likely send the country into a recession, leading to widespread job losses, suspension of Medicare and social security payments and other public service obligations.
“A default on our debt would produce an economic and financial catastrophe”. That’s how Treasury Secretary, Janet Yellen, described the ramifications of a debt default earlier in April.
House Speaker, Republican Kevin McCarthy, has agreed to lift the ceiling by US$1.5 trillion if the government commits to about $4.5 trillion in spending cuts, however, President Joe Biden has, so far, said he is not willing to negotiate spending cuts on money that has already been signed into law.
At this stage, estimates have the government running out of money by June at the earliest, while it could be as far out as September, depending on tax intake over the next few months. So while there is still time, the fact both parties are so far apart might make for an anxious month ahead.