The Congressional Budget Office warned on Wednesday that if the US does not raise its debt ceiling, it can expect to default on payments between July and September.
The debt ceiling was reached again on January 19, forcing the Treasury Department to move funds around in what the CBO calls "extraordinary measures" in order to meet the government's obligation. This new projection from the CBO estimates that the Treasury's bandaid measures will no longer be viable this summer and if Congress does not raise the ceiling once again, the government will "have to delay making payments for some activities, default on its debt obligations, or both."
If the US Government defaults on its debts, there could be a cascade effect resulting in a recession or even a depression. Borrowing would become more expensive, inflation would rise even faster than it has been, international trade would be stifled and large companies holding the debt could have their balance sheets upended when US debt payments stop.
The Republican party has been steadfast in its refusal to raise the debt ceiling unless it comes with corresponding spending cuts, mostly to domestic social spending, focusing on healthcare, labor, and education.
Both parties are responsible for the debt, which now sits at $31.4 trillion. Of the 78 times it has been raised, 49 came under Republican presidents, including three times under former President Donald Trump.
The massive military budget, which officially sits at $858 billion but is actually much higher, appears to be off the table for both parties.
At the heart of the problem is that tax revenue is not keeping up with spending, and the gap between the two is getting worse. The annual budget imbalance is expected to reach $1.4 trillion in 2023, and is expected to increase to $2 trillion from 2024 to 2033 according to the CBO.
Currently, the deficit equates to 5.3% of the country's total GDP, and that number is expected to rise to 6.9% by 2033. As the CBO points out, that is significantly higher than the 3.6% that the deficit has averaged over the last 50 years.
The projections from the CBO exceed its previous expectations from May of last year by $3 trillion, mainly due to new spending legislation and an economic forecast that predicts increased interest rates and mandatory spending increases.
The CBO further notes that the September to July projection is only an estimation and the funds could last longer or dry up faster than they expect. If tax revenues or capital gains are lower than they expect, funds could potentially run out before July.
CBO Director Phillip L. Swagel is set to meet with the press Wednesday afternoon. Prior to the press conference, the CBO released the transcript of his speech. In addition to the debt ceiling, he also has grim predictions for the US economy over the coming year.
"In response to the sharp increase in interest rates that occurred in 2022, the growth of real GDP (that is, GDP adjusted to remove the effects of inflation) comes to a halt in our projections in 2023," said Swagel.
Eventually, as unemployment rises and inflation lessens, Swagel predicts that the Federal Reserve will ease interest rates and the GDP may start growing again, but he does not expect that to happen until 2024 at the earliest.
President Biden and House Majority Leader Kevin McCarthy (R-CA) have met to discuss the issue, but Biden is adamant that he will not negotiate on if the government will pay its debts. Neither Biden nor the Republicans have released a budget proposal, though Biden is expected to release his next month. It is expected that it will include tax increases on wealthy individuals and corporations but few if any spending cuts.
With the House under the control of Republicans, a compromise will have to be reached before any budget can pass. In 2011, during a similar fight over the debt ceiling, while Barack Obama was President, the inaction caused the United States debt rating to be reduced by credit rating agency Standard & Poor's from AAA to AA+.