WASHINGTON — Representative Kevin McCarthy of California finally secured the House speakership in a dramatic middle-of-the-night vote early Saturday, but the deal he struck to win over holdout Republicans also raised the risks of persistent political gridlock that could destabilize the American financial system.
Economists, Wall Street analysts and political observers are warning that the concessions he made to fiscal conservatives could make it very difficult for Mr. McCarthy to muster the votes to raise the debt limit. That could prevent Congress from doing the basic tasks of keeping the government open, paying the country’s bills and avoiding default on America’s trillions of dollars in debt.
The speakership battle suggests President Biden and Congress could be on track later this year for the most perilous debt-limit debate since 2011, when former President Barack Obama and a new Republican majority in the House nearly defaulted on the nation’s debt before cutting an 11th-hour deal.
“If everything we’re seeing is a symptom of a totally splintered House Republican conference that is going to be unable to come together with 218 votes on virtually any issue, it tells you that the odds of getting to the 11th hour or the last minute or whatever are very high,” Alec Phillips, the chief political economist for Goldman Sachs Research, said in an interview Friday.
The federal government spends far more money each year than it receives in revenues, producing a budget deficit that is projected to average in excess of $1 trillion a year for the next decade. Those deficits will add to a national debt that topped $31 trillion last year.
Federal law puts a limit on how much the government can borrow. But it does not require the government to balance its budget. That means lawmakers must periodically pass laws to raise the borrowing limit to avoid a situation in which the government is unable to pay all of its bills, jeopardizing payments including military salaries, Social Security benefits and debts to holders of government bonds. Goldman Sachs researchers estimate Congress will likely need to raise the debt limit sometime around August to stave off such a scenario.
Understand the U.S. Debt Ceiling
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What is the debt ceiling? The debt ceiling, also called the debt limit, is a cap on the total amount of money that the federal government is authorized to borrow via U.S. Treasury securities, such as bills and savings bonds, to fulfill its financial obligations. Because the U.S. runs budget deficits, it must borrow huge sums of money to pay its bills.
Why is there a limit on U.S. borrowing? According to the Constitution, Congress must authorize borrowing. The debt limit was instituted in the early 20th century so that the Treasury would not need to ask for permission each time it had to issue debt to pay bills.
What would happen if the debt limit was hit? Breaching the debt limit would lead to a first-ever default for the United States, creating financial chaos in the global economy. It would also force American officials to choose between continuing assistance like Social Security checks and paying interest on the country’s debt.
Raising the limit was once routine but has become increasingly difficult over the past few decades, with Republicans using the cap as a cudgel to force spending reductions. Their leverage stems from the potential damage to the economy if the limit is not increased. Lifting the debt limit does not authorize any new spending; it just allows the United States to finance existing obligations. If that cap is not lifted, the government would be unable to pay all of its bills, which include salaries for military members and Social Security payments.
The exception to the debt-limit drama was the four years of Donald J. Trump’s presidency, when Republicans largely abandoned their push to tie increases in the limit to cuts in federal spending. In 2021, Senate Republicans clashed with Mr. Biden as the deadline for raising the limit approached, but those lawmakers ultimately helped Democrats pass a law increasing the cap.
Some Democrats pushed to avoid this scenario last year, when it became clear that their party would likely lose at least one chamber of Congress. They hoped to raise the limit again in the lame-duck session of Congress after the November elections that delivered House control to Republicans, to avoid any chance of a default before the 2024 presidential election. But the effort never gained traction.
As a result, the next round of debt-limit brinkmanship could be the most fraught on record — as evidenced by the battle over the speakership. Conservative Republicans have already made clear that they would not pass a debt-limit increase without significant spending curbs, likely including cuts to both spending on the military and on domestic issues not related to national defense.
Their power stems from the fact that Republicans hold a more narrow majority than they did following the 2010 midterms, which empowered the conservative holdouts who opposed Mr. McCarthy. Among that group’s demands were a push for steep cuts in federal spending and a balancing of the federal budget within a decade without raising taxes.
Mr. McCarthy appeared to agree to those demands, pledging not to raise the debt limit without major spending reductions — including efforts to reduce spending on so-called mandatory programs, which include Social Security and Medicare — in a deal that brought many holdouts into his camp.
A speaker who violated that deal could risk being overthrown by the Republican caucus in the House. But Mr. Biden and his party’s leaders in the Democratic-controlled Senate have vowed to fight those cuts — particularly to social safety net programs. That could mean a prolonged standoff that goes on so long the government runs out of money to pay its bills.
Staunch budget hawks in Washington have long argued that the United States needs to stop spending — and borrowing — so much money and that nation cannot afford its long-term debt. They have pushed for a variety of ways to reduce the growth in long-term spending, including cuts to health care for the poor and for older Americans. And many have called for ending some tax breaks while ensuring that the wealthiest and corporations pay more.
Yet most of those fiscal hawks have called the Republican spending demands reckless and likely to produce stalemates on key fiscal issues.
“Their specific ask of balancing the budget in 10 years is just totally unrealistic. It would take $11 trillion in savings,” said Maya MacGuineas, president of the Committee for a Responsible Federal Budget in Washington, which has long pushed lawmakers to reduce future deficits through spending cuts and tax increases.
“I want to save more money than a lot of people,” Ms. MacGuineas said. “But what they’re demanding is just not achievable.”
Hurtling toward a deadline for raising the debt limit would sow chaos in financial markets, including for stocks and Treasury bonds, Mr. Phillips said. If Congress failed to raise the debt limit and the government became unable to borrow more money, Mr. Phillips said, America would suffer a sudden decrease in federal spending equivalent to as much as one-tenth of all daily economic activity.
“This does not feel like a false alarm,” he said.
In 2011, Republicans and Mr. Obama agreed on a deal to raise the debt limit that also imposed future limits on domestic spending increases. Ms. MacGuineas, Mr. Phillips and other analysts expressed skepticism that negotiations between Mr. Biden and House Republicans would do the same this time, in part because the faction that blocked Mr. McCarthy’s ascent this week appears unwilling to compromise for significantly more modest concessions from Democrats.
Administration officials have given no indication that they would negotiate with Republicans over a debt-limit increase at all — nor that they were preparing for the possibility of a House speaker refusing to put a debt-limit increase to a vote without steep spending cuts.
Karine Jean-Pierre, the White House press secretary, told reporters in a briefing on Friday that Mr. Biden expected Congress to raise the debt limit again with no strings attached.
“We have said that we should not be using the debt ceiling as a matter of political brinkmanship,” she said. “We’ve been very clear. If you look at what Republicans in Congress did three times — three times during the Trump administration — is that they were able to deal with it in a way that was responsible, right? They voted three times, again, to lift the debt ceiling. And so Congress must once again be responsible.”
Moderate lawmakers have already begun floating possibilities for how the House might raise the limit. One long-shot idea: a so-called discharge petition signed by a majority of the House to force a vote on a bill. Such a move would presumably rely almost entirely on Democratic votes with a few Republicans joining in. But that outcome is far from guaranteed; it would require extensive coordination by both sides and expose defecting Republicans to punishment and primary challenges.
Still, Representative Brian Fitzpatrick, Republican of Pennsylvania, embraced the possibility of such a compromise this week in an interview with CNN. “There is a number of options to circumvent leadership,” he said. “There is not a ton. But there are options at our disposal.”