As the US approaches the debt ceiling deadline, the potential consequences bring a sense of uncertainty. Political negotiations and market volatility have sparked debates on possible outcomes and their impacts. In this blog, we aim to provide an overview of the US debt ceiling issue and potential paths forward.
The current debt ceiling of $31.381 trillion, agreed upon in December 2021, was reached in January of this year. Since then, the US Government has relied on two sources to fund ongoing spending: the Treasury General Account (TGA) and extraordinary measures. The TGA is essentially a checking account held by the US Treasury at the Federal Reserve, housing accumulated funds from tax payments and debt issuance. Extraordinary measures include actions to extend the deadline for enacting debt limit legislation, such as suspending reinvestments in various federal retirement and exchange stabilization funds. As of May 19, 2023, the TGA balance stands at approximately $60.7 billion, significantly down from the balance of $317 billion at the start of the year. With the debt ceiling reached, the Treasury relied heavily on tax receipts in April and May to support spending. However, tax payments have come in lower than anticipated, leading Treasury Secretary Janet Yellen to project that the available funds could be exhausted as soon as June.
All eyes are now on Washington for an agreement on increasing the debt ceiling. Kevin McCarthy led the passage of a debt limit bill through the Republican-controlled House of Representatives, proposing spending cuts and an annual cap on spending growth over the next decade. President Joe Biden and the Democrat-controlled Senate advocate for deficit reduction through increased taxes on individuals and corporations. McCarthy and Biden have been engaged in regular meetings, closely watched by financial markets.
The question arises: where do we go from here? Our base case is that an agreement between the two parties will be reached prior to funds being exhausted. In previous instances, including 2011, 2013, and 2021, Congress successfully negotiated an increase in the debt ceiling. In the unlikely event that an agreement is not reached, there are two possible avenues to avoid defaulting on debt obligations. The first option would be to prioritize debt payments over other obligations, such as Medicaid, infrastructure, education, and law enforcement funding. The second option would involve President Biden invoking the 14th amendment, which states that “the validity of the public debt authorized by law … shall not be questioned.” While legal experts hold varying opinions on the interpretation of this clause, President Biden’s intent would be to bypass Congress and raise the nation’s debt limit.
In the face of the approaching US debt ceiling deadline, the expectation remains that an agreement will be reached between parties to avoid financial turmoil, while alternative measures and legal interpretations provide potential paths forward in the unlikely event of a failure to reach a consensus.
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