A GOP showdown over the debt limit could grip Congress and the nation next year

by Jennifer Shutt, Virginia Mercury
October 27, 2022

WASHINGTON — Republicans are eyeing the debt limit and government funding deadlines as a way to force Democrats to the negotiating table for spending cuts should the GOP regain control of Congress following the midterm elections.

Republicans unhappy about government spending could move to shut down the government, a tactic unsuccessful for the GOP in past battles over Obamacare and the Trump border wall. Their potential refusal to adjust the debt limit could bring the nation to the verge of a damaging default, economic experts say.

The debt limit, currently set at $31.4 trillion, allows the Treasury Department to borrow money in order to pay all of the nation’s bills in full and on time. When the federal government nears that limit, likely in the second half of 2023, it can either raise it to a new spending level or suspend it through a certain date.

Taking no action — and thus defaulting on the debt — would mean the U.S. government has no more borrowing authority and can only spend what it brings in through taxes and other revenue streams.

That would lead to unprecedented cuts and would likely affect payments for Social Security, Medicare and Medicaid as well as hundreds of other federal programs, along with a tide of economic repercussions.

U.S. House Republican Leader Kevin McCarthy, who hopes to become speaker if the GOP regains control of the House, told Punchbowl News last week that he’s likely to leverage the debt limit for reductions in federal spending.

“You can’t just continue down the path to keep spending and adding to the debt,” the California Republican said. “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. We’re not just going to keep lifting your credit card limit, right? And we should seriously sit together and [figure out] where can we eliminate some waste? Where can we make the economy grow stronger?”

When asked if spending cuts would need to include changes to entitlement programs like Social Security and Medicare, McCarthy said he didn’t want to “predetermine” negotiations.

Republicans are projected to regain control of the U.S. House following the midterm elections, though whether they’ll become the majority in the Senate is less clear.

The Cook Political Report with Amy Walter changed its prediction for House control this week from Republicans gaining 10 to 20 seats to the GOP picking up 12 to 25 seats.

The future of the 50-50 Senate is less clear, with the Cook Political Report rating three seats held by Democrats and two held by Republicans as “toss ups.”

Past standoffs

One result of a stalemate over government spending could be a government shutdown at some point in 2023, a move the GOP has used in the past to try to get its way.

Republicans, however, have never pushed the country past the debt limit and into default, a move that would likely send the stock market and the world economy into a tailspin. But they pushed up close to the line in a debt limit crisis in 2011, during the Obama presidency, leading S&P to downgrade the nation’s credit rating to AA-plus.

During the Trump administration, lawmakers from both political parties voted three times to suspend the debt limit. Congress voted on the debt limit once during the Biden presidency, raising it by $2.5 trillion on a mostly party-line vote in December 2021. Illinois Rep. Adam Kinzinger was the sole Republican in Congress to vote to raise the limit.

The renewed debate about government spending and the debt limit follows record trillion-dollar spending during both the Trump administration and under President Joe Biden, pushing the nation’s debt upward.

No specifics yet

Republicans have not been clear about what government spending should be reduced.

They so far have not released a detailed plan for exactly what federal departments would see funding cuts, or how they might attempt to alter the fastest drivers of federal spending — Medicare, Medicaid and Social Security.

With days to go ahead of the Nov. 8 midterm elections, Democrats are calling the GOP’s proposed strategy irresponsible.

“The Republicans have made it clear that if they win control of the Congress, they will shut down the government, refuse to pay our bills, and it’ll be the first time in our history America will default unless I yield and cut Social Security and Medicare. Flat-out saying that,” Biden said this week at a Democratic National Committee event.

“In order to cut Social Security and Medicare, they’re threatening to default on the federal debt,” Biden added. “There’s nothing — nothing that will create more chaos, more inflation, and more damage to the American economy than this.”

House Majority Leader Steny Hoyer, a Maryland Democrat, said in a written statement, “The debt limit is a phony issue, and it is appalling and dangerous that Congressional Republicans continue to threaten holding the U.S. economy hostage to slash Social Security and Medicare. The United States’ full faith and credit must not be used as a political pawn.”

But not all Republicans, including some crucial leaders like Senate Minority Leader Mitch McConnell, have weighed in on supporting the idea. A spokesman for McConnell declined to say if the Kentucky Republican supports a showdown over the debt limit.

What happens in a shutdown

Government shutdowns, so far kept separate from debt limit battles, are hugely problematic for the federal government, which sends non-exempt employees home without pay and requires exempt employees to work without getting a paycheck.

A shutdown cannot begin at any time, but must line up with a funding deadline.

The federal government runs on a fiscal year that ends on Sept. 30, making that the most predictable deadline for negotiations. Congress, though, typically passes a short-term spending package that covers the period through mid-December to work out a bipartisan agreement on spending levels and the dozen spending bills.

This year that deadline is Dec. 16, during the lame duck session of Congress, a typical maneuver that both political parties have used in the past.

If Republicans and Democrats can’t agree on a full-year spending package to fund the government through Sept. 30, 2023, they’ll have to pass another stopgap spending bill, setting up a new fiscal cliff and the opportunity for a shutdown sometime next year.

Obamacare, border wall episodes

Aside from hitting federal operations and employees, government shutdowns have a negative impact on the economy as well.

A 16-day shutdown over Obamacare in 2013 reduced fourth-quarter real GDP growth throughout the country between 0.2 and 0.6 percentage points, or between $2 and $6 billion, according to a report from the Office of Management and Budget.

Republicans also didn’t repeal the 2010 health care law they were frustrated with.

During the Trump administration there was a relatively uneventful two-day shutdown that began on Jan. 20, 2018. A more significant 34-day partial government shutdown began on Dec. 22, 2018, over Trump’s hope Congress would provide more funding to build his proposed wall at the Mexico border.

The Trump administration’s budget request for that fiscal year asked Congress for $1.6 billion for 65 miles of “border wall system,” which the Senate Appropriations Committee later approved on a bipartisan 26-5 vote.

Trump then upped his request to $5 billion, leading to the longest partial government shutdown in the nation’s history.

The spending package Congress approved afterward included $1.375 billion for 55 miles of barriers along the U.S. Mexico border.

That shutdown affected 800,000 federal employees, many of whom live in the Virginia and Maryland suburbs outside of Washington, D.C, according to an analysis from the Congressional Budget Office. While federal workers were paid later, private businesses lost money, the analysis said.

The episode also reduced GDP in the fourth quarter of 2018 by $3 billion and by $8 billion during the first quarter of 2019, according to CBO.

Defaulting on the debt

The impact of walking up to a default on the nation’s debt, or actually defaulting for the first time in the country’s history, would be much more significant than a government shutdown.

Shai Akabas, director of economic policy at the Bipartisan Policy Center, said the way Congress has approached raising or suspending the debt limit during the past decade or so is “unconstructive, risky, and dangerous.”

He also noted that fights over the debt limit haven’t had the impact that many policymakers have claimed they would.

“We’ve gotten no net deficit reduction from debt limit deals over the past decade,” Akabas said. “In fact, more often than not, they’re being used to increase deficits: ‘You get a little more of your spending, we get a little more of our spending, and we call it a day.’”

“​​And that’s of course not the purpose that they have in mind for it,” he added.

Following the 2011 debt limit debacle, Congress passed and then-President Barack Obama signed the so-called Budget Control Act, intended to hold down increases to defense and domestic discretionary spending for a full decade.

But lawmakers have regularly passed spending cap deals to raise those “austere” spending limits, bolstered by votes from both Republicans and Democrats.

Political fights over the debt limit in the past have led to dire warnings about the severe consequences for the world economy.

“Global financial markets and the economy would be upended, and even if resolved quickly, Americans would pay for this default for generations, as global investors would rightly believe that the federal government’s finances have been politicized and that a time may come when they would not be paid what they are owed when owed it,” Moody’s Analytics Chief Economist Mark Zandi and Assistant Director Bernard Yaros wrote in a September 2021 report released amid the last round of brinkmanship on the debt limit.

“To compensate for this risk, they will demand higher interest rates on the Treasury bonds they purchase,” they added. “That will exacerbate our daunting long-term fiscal challenges and be a lasting corrosive on the economy, significantly diminishing it.”

Effect of default on states

State governments would be significantly affected by a default on the debt as well, according to a report from the Center on Budget and Policy Priorities, a center-left think tank.

Deputy Director of Research Whitney Tucker wrote in a report from September 2021 that the federal government would need to cut spending by $1.2 trillion during that fiscal year if Congress failed to suspend or raise the debt limit.

The magnitude of the cuts, she wrote, “would be stunning” and would likely force reductions in programs that “help states provide health care, education, and other services.”

Jason Furman, chairman of the Council of Economic Advisers for the Obama administration, wrote this week that the “odds of something worse than the 2011 brinksmanship are higher than ever before and the consequences would be even worse than before.”

He then called on Democrats in Congress to use the budget reconciliation process, which gets around the Senate’s 60-vote legislative filibuster, to raise the nation’s borrowing limit to $100 quintillion before this session of Congress ends — a figure so high it would essentially eliminate the debt limit.

If Congress waits until next year to address the debt limit, when Republicans are expected to control at least one chamber, Furman warned that debt limit fights could lead to a “more serious, much worse” situation than what took place in the United States in 2011 when the nation’s credit was downgraded.

“The situation could be riskier than 2011 because although the GOP leaders today, like then, understand that default would be terrible, their caucuses are even less governable,” Furman wrote. “Add in the possibility of candidate Trump telling them not to compromise and it could (be) very difficult.”

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