A battle over the U.S. debt ceiling is brewing if Republicans take one or both chambers of Congress in the midterm elections on Nov. 8, analysts say, and the thought of a possible default has one budget expert warning of disastrous consequences for Americans.
Policy analysts have been predicting for weeks that the GOP taking even partial control of Congress would heighten the risk of a debt-ceiling showdown next year, and comments this week by House Minority Leader Kevin McCarthy, a California Republican, reinforced that view. Speaking to Punchbowl News, McCarthy said: “You can’t just continue down the path to keep spending and adding to the debt.
“And if people want to make a debt ceiling [for a longer period of time], just like anything else, there comes a point in time where, okay, we’ll provide you more money, but you got to change your current behavior.”
Democrats blasted other comments by McCarthy — who is seeking to become House speaker if Republicans win the chamber — related to entitlement programs, but he told CNBC on Wednesday that he “never mentioned” Social Security or Medicare in relation to the debt ceiling. The statutory ceiling is roughly $31.4 trillion.
With the debt ceiling back in the news, MarketWatch reached out via email to Maya MacGuineas, president of the Committee for a Responsible Federal Budget, a Washington-based nonpartisan organization. MacGuineas, a veteran budget expert, answered five questions about the debt ceiling, including why there is one in the first place — and what default would mean for Americans’ money.
Americans are likely going to hear a lot about the debt ceiling in the next Congress, or before. Why is there a debt ceiling, anyway?
Congress created the debt ceiling to limit federal borrowing — it is the only limit we currently have in place. In the past, many increases have also included policies or processes to improve the fiscal trajectory, but more recently in our more polarized political environment, there have been threats of default, and the attachments have increased the debt rather than decreased it. We should consider replacing or reforming the debt ceiling, but it would be unwise to just drop it without anything else to help limit our borrowing.
Has using the debt ceiling to achieve policy goals in the past had any results?
Yes, both good and bad. Up until 2015, debt-ceiling increases were often accompanied by deficit-reduction measures or the creation of a process for addressing excessive borrowing. The 2011 Budget Control Act raised the debt ceiling while enacting more than $900 billion of savings, largely in the form of caps on discretionary spending. However, since 2015, policymakers have opted instead to accompany increases in the debt ceiling with deficit-increasing measures — mostly increases in discretionary-spending caps. It would be desirable to return to the practice of including measures that improve the fiscal situation as part of a smooth debt-ceiling increase. (It would also be desirable for Congress to start passing budgets and acting civilly.)
What are some of the consequences of default that would hurt ordinary Americans?
Breaching the debt ceiling and defaulting on our debt would be a disaster. Because many interest rates throughout the economy are pegged to the interest rate on government debt
borrowing would become more expensive instantly for ordinary Americans, the federal government would not be able to pay any of its bills, and the global economy would likely be rocked by a U.S. default.
What would happen to U.S. stocks and government bonds should the debt limit be breached?
If the debt limit were breached without any further way to avoid it (such as “extraordinary measures” that have been used in the past to manage cash obligations while the government was nearing its debt ceiling), the effects would be devastating for the economy and capital markets. The government would be unable to pay its financial obligations, credit ratings agencies would likely downgrade U.S. debt, and the stock market
would tumble on news of default of the largest government in the world.
When push comes to shove, do you think either party would actually allow the U.S. to default?
I like to hope not and I think the risk is lower than it used to be, but behavior in Congress continues to deteriorate. The fiscal issue threatens our economy and our national security — I do hope our leaders can have a drama-free debt-ceiling increase and simultaneously put in place a process to help deal with our unsustainable debt.