What happens if US fails to lift debt limit by June 5?

WASHINGTON – US Treasury Secretary Janet Yellen on Friday

updated the date for a possible United States debt default to June 5

if Congress fails to raise the ceiling on borrowing, pushing back a previous estimate of June 1.

This gives negotiators for President Joe Biden and House Republican Speaker Kevin McCarthy a little breathing room as they work to find a bipartisan solution to lift the current spending cap,

known as the debt ceiling.

But although murmurs of a possible deal have grown in recent days, no agreement has yet materialised as lawmakers head into the long Memorial Day weekend.

With each day that passes, the chance of the United States stumbling into a scenario where it cannot pay all its existing bills – known as the “X-date” – is increasing.

‘Hard choices to make’

In mid-January, the US federal government reached its borrowing cap of more than US$31.4 trillion (S$42 trillion). Since then, it has used special accounting measures to extend the life of the money it is allowed to spend without raising the borrowing limit.

But it can do so only for so long before it runs up against the debt ceiling. At that point – currently June 5 – it will be able to spend only what it brings in through taxes.

Between June 1 and June 15, the Treasury Department will have a funding shortfall of more than US$100 billion, according to Treasury data analysis by the Bipartisan Policy Centre think-tank.

If the US hits the debt ceiling, there will be “hard choices to make about what bills go unpaid”, Dr Yellen said recently.

With both parties to the negotiations insisting that the US will not default on its debts, that leaves government spending as the place where these hard decisions will have to be made.

The Treasury Department could choose to defer certain payments for Social Security, Medicare and Medicaid programmes, which help tens of millions of people with pension and healthcare costs.

Alternatively, it could pause some payments across the board, which would lessen the impact on Social Security and healthcare recipients, but increase the number of government services affected.

Default ‘not an option’

If the Treasury Department makes it to June 15 without defaulting on any of its financial obligations, it may be able to avoid a damaging default in the weeks that follow.

Around US$80 billion in revenues are due from quarterly individual and corporate income taxes, according to the Bipartisan Policy Centre, far exceeding the US$22 billion that is due to be spent.

This will breathe fresh life into government coffers, keeping the Treasury afloat for a little while longer, assuming no significant unexpected outflows of funds are required.

But given that tax revenues consistently bring in less than what the government spends, this plan is not a sustainable one.

“Default is not an option, and all responsible lawmakers understand that,” the White House said in a recent statement.

At some point, the Republicans and Democrats will have to reach agreement to lift the debt ceiling, or institute dramatic spending cuts. AFP