WASHINGTON (TND) — Negotiations over how to raise the debt ceiling and how to handle the federal government’s finances will begin in earnest next week as the deadline to cut a deal inches closer and increases the risk of sending the economy into a tailspin.
The White House Council of Economic Advisors released its own forecast of the damage that could be done as the U.S. nears a default with the X-date, or when the Treasury Department will no longer be able to pay its bills.
Outcomes ranged from a small contraction if there is political brinksmanship to a Great Recession-like economic collapse if there is a protracted default. In the most extreme scenario, 8.3 million people would lose their jobs along with a 45% drop in the stock market.
A brief default, which would be an unprecedented event, would cause 500,000 people to lose their jobs, the CEA said. Even approaching a default would cause economic contraction and could start a recession, a scenario the U.S. is already trying to avoid amid the Federal Reserve’s interest rate increases to bring inflation down.
In addition to being unable to make payments on interest and disperse benefits like Social Security payments, the government would also be unable to pay its thousands of employees.
“It is effectively asking the military and asking the federal workers to come to work, but there's no guarantee of pay,” said Bill Hoagland, senior vice president of the Bipartisan Policy Center and a former staff member for Senate Republican leadership.
The U.S. is going to reach that point sooner than anticipated after the Treasury Department released an updated estimate of when the country would reach the X-date, which could now come as soon as June 1. That was faster than anticipated, thanks at least in part to a more efficient Internal Revenue Service that is processing tax returns much faster than in recent years thanks to an infusion of cash from the Inflation Reduction Act.
Given the current projections, it is imperative that Congress act as soon as possible to increase or suspend the debt limit in a way that provides longer-term certainty that the government will continue to make its payments,” Treasury Secretary Janet Yellen wrote in a letter to the congressional leaders.
There are also very few days when the House and Senate are scheduled to be in session and President Joe Biden will be in Washington. Only six days line up with all three simultaneously before the potential June 1 deadline. Congress can schedule more time in Washington and the White House could cancel some of Biden’s travel to continue negotiations, but it is another example of the limited time the two sides have to come together to find an agreement.
“The sooner they act, the better to avoid any kind of real crisis,” Hoagland said. “For those of us who have been through this a number of times, this is one [that] seems a little bit more dicey.”
The sooner-than-expected deadline seems to have added some urgency for the White House and Congress, as congressional leaders will go to the White House on Tuesday. It is the first meaningful negotiation between the two parties since February and comes after House Republicans approved their own plan to address the debt ceiling and federal spending.
Biden and Democrats in Congress have blasted the plan and maintained calls for a clean raise of the debt limit, but the White House has been under increasing pressure from some lawmakers to negotiate.
We should engage in this debate rather than trying to avoid it by demanding a clean debt ceiling raise,” Rep. Jared Golden, D-Maine, told Politico. “Let’s call (Republicans) out on their fiscal irresponsibility and let’s welcome them to the table for a real solution, which I think means reducing spending — because that is the environment we’re in, with a divided government anyways — and raising revenues to put towards that reduction.”
Negotiations on the debt limit running down to the wire have become essentially common practice in the U.S., with a series of last-minute agreements and negotiations that have been able to avert the most serious consequences.
“It's the usual thing like waiting to do last minute do your homework or something,” Hoagland said. “It's just human nature, but it's even worse for politicians because the decisions they have to make are pretty tough decisions and the more they can delay, defer, prognosticate over it, the better I guess from their perspective.”