A failure by Congress to raise the US federal borrowing limit could lead to the loss of almost eight million jobs and trigger an “immediate, sharp recession on the order of the Great Recession,” according to a report from the White House Council of Economic Advisors, citing Moody’s study. The risk from Congress not raising the debt ceiling has been steadily rising in recent months. Treasury Secretary Janet Yellen warned that the US could default on its debts as early as June 1 if lawmakers do not raise the borrowing limits. If that happens, the US risks the loss of nearly two million jobs and an increase in the unemployment rate to almost 5%. Reports suggest that protracted default would be the most serious of the three scenarios presented by the study, with the US losing 8.3 million jobs in the third quarter of 2023. In such a scenario, the government would be unable to implement counter-cyclical measures to counteract the economic downturn.
The negative impact would be felt globally as an extended breach of the US debt ceiling could seriously damage investor trust in the US government, cause interest rates to soar, cut into mortgages, increase credit card repayments and consumer spending, leading to possible lay-offs, and hitting the credit market. If the impasse lasts for six weeks, more than seven million job losses could occur, the economy could decline by more than 4%, and the unemployment rate could soar above 8%.
Meanwhile, the effects of payment delays that could result from such a breach are expected to be severe and far-reaching. While a 1996 law provides an escape clause that allows the Treasury Department to continue paying even if there is a delay in raising the debt ceiling, payments on federal pensions, Medicare and Medicaid, school lunch programs, veterans’ benefits, and housing assistance would still be at risk. Notably, around 40% of social security recipients rely on social security payments for 90% of their income, equal to around $25bn disbursed every week. A delay in payments would put a significant burden on many recipients and, in some cases, could affect payments to hospitals, doctors, and healthcare insurance plans, as well as payments to federal employees and veterans’ benefits. The US credit rating would most likely be downgraded, sending interest rates higher and making it more expensive for businesses, consumers, and the government to borrow money. Even resolving the debt-ceiling impasse would not necessarily see the stock market recover fully, which could wipe out around $12tn in household wealth.
The Council of Economic Advisors report aligns with warnings from the International Monetary Fund and the OECD that the fiscal consequences of the pandemic have increased the risk of debt crises around the world, and the US is no exception. Failing to pay down debt quickly enough could ultimately damage investor confidence and lead to a rise in borrowing costs. The Biden administration seeks a “clean” increase to the US’ $31.4tn debt limit, while Republican House representatives are insisting on budget cuts as part of any agreement to avoid default. Congress must now act swiftly to raise the borrowing ceiling, and the longer it stalls, the greater the risk of a significant economic downturn.
