Senate Democrats charged Thursday that House Republicans’ debt limit demands would tip the US into a recession through a forced choice of either sharp spending cuts or a federal default.
(Bloomberg) — Senate Democrats charged Thursday that House Republicans’ debt limit demands would tip the US into a recession through a forced choice of either sharp spending cuts or a federal default.
Democrats made the case in a hastily assembled Senate Budget Committee hearing as both parties struggled to win over public opinion ahead of a meeting on the debt limit next week between President Joe Biden, Republican House Speaker Kevin McCarthy and other congressional leaders.
“House Republicans are saying if you don’t let us wreck the economy and whittle down essential government services to the point where we are laying off air traffic controllers, then we will just wreck the economy by refusing to pay the bills instead,” said Democratic Senator Patty Murray of Washington.
The hearing underscored how far apart the two parties are on the debt ceiling and the rising risk the US defaults for the first time on a payment obligation.
Treasury Secretary Janet Yellen warned the federal government may exhaust its ability to pay bills without a debt limit increase by June 1. The US Treasury on Thursday auctioned one-month bill at the highest-ever yield for the tenor, underscoring how quickly the debt-ceiling landscape has shifted since Yellen’s announcement.
Moody’s Analytics chief economist Mark Zandi told the Senate panel that the timing of the Republican-backed federal spending cuts amid worries of a recession ahead are “especially inopportune — it would meaningfully increase the likelihood of such a downturn.”
Moody’s Analytics forecast the Republican budget cuts would reduce employment growth by 784,000 jobs through 2024 while a default that stretched on at least six weeks would cost the economy more than 7 million jobs.
Democratic Senator Sheldon Whitehouse, the panel’s chairman, cast the choice as “default or disaster.”
Senate Republicans at the hearing countered that Biden has refused to negotiate with McCarthy since the beginning of February and that many past debt ceiling increases were coupled with spending cuts, such as that in 2011.
“House Republicans have acted responsibly by passing a debt ceiling increase,” said Committee top Republican Chuck Grassley said. “In contrast President Biden and Democrats have sat idly by.”
Brian Riedl, a senior fellow at the Manhattan Institute said that the level of US debt is unsustainable and will lead to a much bigger crisis if not reduced.
“If we don’t deal with this, the bond market will cut us off at some point and it will be much more painful,” he testified.
House Republicans’ plan would increase the US debt ceiling by $1.5 trillion, which would stave off a US payments default until March 31, 2024 at the latest. In exchange, Republicans demand $4.8 trillion in budget deficit cuts over a decade, defying Biden’s demands for a so-called “clean” debt ceiling increase.
The savings in the bill would be achieved by cutting discretionary spending in 2024 by $130 billion to 2022 levels and capping its growth at 1% for a decade. In addition, it would add new work requirements for some Medicaid and increasing them for food stamps and welfare.
Riedl scoffed at the idea that rolling back discretionary federal spending in 2024 to levels from two years earlier would devastate the US economy.
Zandi told the committee his best estimate of a default date is June 8 and the best case scenario is Aug. 8. He recommended that lawmakers pass a short debt ceiling increase to the Oct. 1 beginning of the next fiscal year to give time for a budget agreement.
More stories like this are available on bloomberg.com
©2023 Bloomberg L.P.