US overdraft hits its limit as political stand-off brews

Republicans are using the federal debt ceiling as leverage to force spending cuts

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The US government was due to hit its $31.4 trillion borrowing limit on Thursday, amid a stand-off between the Republican-controlled House of Representatives and President Joe Biden's Democrats that could lead to a fiscal crisis.

Republicans, with a newly won House majority, aim to use the congressionally mandated federal debt ceiling to exact spending cuts from Mr Biden and the Democratic-led Senate.

Thursday's deadline will have little immediate effect, because Treasury officials are prepared to begin employing emergency cash management measures to stave off default. More serious risks will emerge closer to June, when the government approaches the so-called X date, beyond which the Treasury would run out of emergency manoeuvres.

Ahead of that deadline, there was no sign that either side was willing to bend.

“It is something that should be done without conditions. We should not be negotiating around it. It is the basic duty of Congress to get that done,” White House Press Secretary Karine Jean-Pierre told reporters.

Republicans are instead pursuing a plan that would seek to avert default by urging the Treasury to prioritise debt payments, and possibly other areas such as Social Security and Medicare, should the limit be breached during negotiations. Republicans hope to complete the legislation by the end of March.

The prospect for brinkmanship has raised concerns in Washington and on Wall Street about a bruising fight over the debt ceiling this year that could be at least as disruptive as the protracted battle of 2011, which prompted a downgrade of the US credit rating and years of forced domestic and military spending cuts.

“We're not going to default on the debt. We have the ability to manage services and pay our interest. But we similarly should not blindly increase the debt ceiling,” Representative Chip Roy, a leading conservative, said.

Mr Roy dismissed concerns about unsettling markets and risking a recession.

“That's what they say every time. It's like clockwork,” Mr Roy said.

“We're already barrelling towards a recession. The question is what it's going to look like — unless the combination of monetary policy and fiscal policy saves us from our stupidity of having spent so much money.”

Congress adopted a comprehensive debt ceiling, the statutory maximum of debt the government can issue, in 1939, intending to limit its growth.

The measure has not had that effect, as, in practice, Congress has treated the annual budget process — deciding how much money to spend — separately from the debt ceiling, in essence agreeing to cover the costs of previously approved spending.

Negotiations on debt prioritisation and spending are not expected to get into full swing until politicians return to Washington next week.

Updated: January 19, 2023, 4:29 PM
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