Topline
As the 118th House kicks off official business, lawmakers are set to embark on a contentious showdown over federal government spending and the nation’s debt limit—an issue many experts believe could push the government to shut down for the first time in nearly five years, halting critical services and in the most severe outcome, risking a historic U.S. debt default.
A government shutdown “looks fairly likely” this year, Goldman Sachs economists warned clients on … [+]
Key Facts
Government spending deadlines will “pose a greater risk this year than they have for a decade,” Goldman Sachs economists led by Jan Hatzius warned in a Monday note to clients, pointing to the divided Congress as a complicating factor for crucial legislation, with an “extremely thin” margin of Republican control in the House and a two-vote lead by Senate Democrats.
Further complicating matters, new rules introduced by House Republicans include several opportunities to object to legislation meant to increase spending, taxes or the deficit—a sign Republican leaders could try to shift public attention to the government’s growing debt, particularly after the larger-than-expected omnibus spending bill passed in late 2022 despite conservative opposition.
The national debt currently stands at a record $31.3 trillion and is just $98 billion away from reaching the federal limit of $31.4 trillion; though the exact timing of a funding lapse depends on the size of the budget deficit, Goldman estimates the limit could be hit as early as August and “very likely” by October unless Congress raises it beforehand.
Additionally, the divided Congress will need to renew government spending authority by September 30 to avoid a government shutdown.
“A close call seems likely on both issues,” Goldman’s Alec Phillips writes, noting conservative Republicans could insist on spending cuts that make party leadership feel unable to put an extension of government spending authority to a vote.
Phillips says a compromise will likely be found “eventually,” but he notes a “government shutdown looks fairly likely,” threatening furloughs for hundreds of thousands of federal employees and a temporary halt to critical services like new loans from the Federal Housing Administration and Small Business Administration.
Tangent
Budget pressures should rise gradually as the Federal Reserve continues to hike interest rates this year, wealth advisory Glenmede wrote in a Monday note to clients, warning that fiscal brinkmanship, as illustrated by the debacle over the House’s speakership, could “accelerate those risks.”
Key Background
According to the Treasury, Congress has either raised, extended or revised the definition of the debt limit 78 times since 1960, and it has yet to fail to act on the debt limit when necessary. Still, Goldman warns the debt limit debacle this year could be the worst since the 2011 crisis that triggered a market correction. That year, House Republicans, newly in the majority, pressed former President Barack Obama’s administration for spending cuts and used the threat of a government default or shutdown as leverage. The Treasury ultimately incurred a rating downgrade on its debt, though a shutdown was avoided. “This year looks likely to follow the same script,” says Phillips. Meanwhile, the last government shutdown marked the longest in history. It began with a Republican-led House in December 2018 and ended the following month after Democrats took control of the chamber.
What To Watch For
If the U.S. defaults, the Treasury would still bring in tax revenue, but a big source of cash—debt—won’t be accessible, meaning federally funded programs—including disaster relief efforts and infrastructure funding—could also be halted, the White House wrote in a letter when the government was just days away from hitting its debt limit in 2021. “Hitting the debt ceiling could cause a recession,” officials cautioned.
Further Reading
What To Watch For As Republican-Controlled Congress Finally Gets Down To Business (Forbes)
Tens Of Millions Of Americans Could Lose Benefits ‘Overnight’ If U.S. Defaults (Forbes)
Source: https://www.forbes.com/sites/jonathanponciano/2023/01/09/debt-limit-showdown-and-government-shutdown-pose-greatest-risk-in-a-decade-heres-what-to-expect/