While a divided Washington has made little progress in raising the U.S. debt limit so far this year, there will be an endgame at some point.
Here’s what looks likely to come next.
Republican-led House aims to vote on proposal in a matter of weeks
In a speech Monday at the New York Stock Exchange, House Speaker Kevin McCarthy said his chamber will vote “in the coming weeks” on a proposal that would suspend the limit on federal borrowing for a year, while returning federal spending to 2022 fiscal-year levels and limiting the growth of outlays over the next 10 years to 1%.
McCarthy and his fellow Republicans have demanded spending cuts in exchange for raising the ceiling for federal borrowing, while President Joe Biden and his fellow Democrats have said the lift should be made without conditions.
During his remarks at the NYSE, the speaker reiterated his call for Biden to negotiate on the debt limit, saying: “The longer President Biden waits to be sensible, to find an agreement, the more likely it becomes that this administration will bumble into the first default in our nation’s history.”
But top Democrats did not sound won over at all, with Senate Majority Leader Chuck Schumer saying McCarthy is continuing to “bumble our country towards a catastrophic default.”
Fresh estimate for ‘X date’ to drive talks
The Bipartisan Policy Center estimated in February that the “X date” — the day when the government can’t meet all obligations — likely will arrive in the summer or early fall, with the exact timing depending heavily on 2022 tax collections that are hitting their peak this month.
So there could be a better estimate for the X date in late April, following the filing of tens of millions of tax returns.
“The White House is now saying they expect to have an updated estimate of the ‘X date’ about a week after Tax Day on 4/18,” said Tobin Marcus, senior U.S. policy and politics strategist at Evercore ISI, in a note.
“This will be a big catalyst to prompt more activity in D.C., as Congress can only really function with looming deadlines, and the updated estimate will drive a lot of headlines,” Marcus added. “Our best guess prior to this update is that the X Date will probably land in July.”
Related: Why was Tax Day on April 18 this year — and not April 15?
June could be when markets tune in before a ‘messy’ resolution
Marcus said if the X date ends up being in July, Evercore “would expect D.C. activity to start to pick up in May, with markets tuning in more in June as urgency in D.C. starts to crank up further.”
He sees “little if any overt negotiation going on” until after the GOP-run House succeeds or fails at passing its proposal.
“This leaves June and July for more concerted bipartisan negotiations. We continue to believe the showdown will probably go until the 11th hour before a messy resolution,” he said.
Marcus also said Evercore is “skeptical of the buzz that the two sides might
agree to a short-term extension of the debt-ceiling deadline to align with the end of the fiscal year on Sep. 30.”
Meanwhile, 22V Research’s Kim Wallace said this year’s standoff over the debt limit is likely to weigh on markets, but there are “very, very low odds of default” and “worst-case outcomes.”
“My guess is that sometime beginning Memorial Day the parties will begin to circle around each other and eventually negotiations will be engaged on fiscal year ’24,” said Wallace, 22V’s head of Washington policy research, in a recent interview with MarketWatch.
“The question will remain, and it will vex markets and anyone else who pays attention between now and late summer or fourth quarter,” he added. “It will vex you in terms of the process and how they get there, but very much more than likely they’ll get there. It’ll be loud, messy, probably displeasing for most stakeholders and participants, but they’ll get there.”
See: U.S. debt-ceiling brinkmanship threatens market calm after bout of ‘intense volatility’ on bank fears
Why stocks plunged in 2011 after that year’s debt-limit standoff
This past January, the Treasury Department said it had started to use “extraordinary measures” because the federal government was running up against its ceiling for borrowing.
When the government reaches that ceiling, it can’t increase its outstanding debt and can only draw from cash on hand, spend incoming revenues and take those so-called extraordinary measures, White House economists noted in a blog post in 2021 — amid an earlier standoff over the limit. “
While the United States has hit the debt limit before, it has never run out of resources and failed to meet its financial obligations,” they added.
But the country got close a dozen years ago. In August 2011, lawmakers approved an increase to the debt limit just hours before a potential government default. Within days, the U.S. then lost its triple-A debt rating from Standard & Poor’s for the first time in history, with the credit-rating agency saying the American political system had become less stable.
Why the U.S. government has a debt limit
Congress for more than a century used to authorize each sale of Treasury bonds to pay for specific projects, but U.S. lawmakers gave the Treasury Department more flexibility on the country’s debt in 1917, as officials faced the onset of World War I and a federal government that was growing in size.
Then, just before World War II, Congress gave the Treasury almost unlimited power to decide what securities to sell and how to best manage the nation’s debt — subject to an overall limit.
Ever since then, Washington has produced many battles over raising the limit on federal borrowing to pay for spending already approved by Congress and presidential administrations, with both Republican and Democratic presidents having to cajole reluctant lawmakers, as MarketWatch has previously reported.
A New York Times editorial in the 1980s complained that “the fight to raise the debt ceiling is a periodic ritual on Capitol Hill, and every battle is surrounded by predictions of fiscal ruin.”