US Could Default as Soon as July if Debt-Ceiling Standoff Isn’t Resolved

In its estimate on Wednesday, the CBO said the so-called extraordinary measures could also run out before July if its expectations for tax revenue are off.

“The projected exhaustion date is uncertain because the timing and amount of revenue collections and outlays over the intervening months could differ from CBO’s projections,” the agency said for The WSJ Print Edition Subscription.

Republicans and President Biden have been impasse over raising the debt limit this year. Republicans recently took control of the House and are demanding that any deal on raising the debt limit to be accompanied by unspecified spending cuts. The White House and Democrats in Congress have rejected the possibility of spending cuts, arguing that lawmakers should raise the debt limit without any other conditions.

While lawmakers routinely spar over spending, the current debt-ceiling standoff has heightened fears among some market watchers and lawmakers over the possibility of a default. A failure by the U.S. to pay its bills on time could send financial markets into a tailspin and wreak broader havoc on the global economy.

In 2011, Standard & Poor’s stripped the U.S. of its triple-A credit rating for the first time after the Treasury came within days of being unable to pay certain benefits.

The Treasury Department said its extraordinary measures would last until at least early June. The timing of potential default hinges on several factors, including incoming tax receipts. The Treasury is also looking to encourage lawmakers to act soon.

“There’s no question Treasury wants to say, look, we are in dire straits; we don’t have any room to maneuver. It would help if you fixed this, and so they err on the side of putting it early,” said Douglas Holtz-Eakin, a former CBO director who is now the president of the conservative American Action Forum.

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The Treasury, CBO, and other independent forecasts will offer more precise estimates for the date the U.S. could default as it approaches.

The battle over the debt limit has thrust decadeslong debates about government spending to the forefront of Mr. Biden’s presidency. Deficits have ballooned under the leadership of Republicans and Democrats in recent decades, with a burst of Covid-19 aid adding trillions of dollars to the debt in 2020 and 2021.

As those aid programs have wound down, the U.S. deficit narrowed precipitously last fiscal year. Democrats have touted that record as they argue that their plans would help close the deficit by raising taxes, attacking Republicans for their desire to cut spending.

The CBO also forecast Wednesday that the U.S. deficit would hold largely steady this fiscal year at roughly $1.4 trillion before expanding over the next decade as higher costs for Social Security, Medicare, and interest on the debt increase spending. The CBO’s estimates assume that lawmakers will make no changes to current policies over the next decade.

The size of the debt held by the public compared with the size of the economy will expand from 98% of the gross domestic product in 2023 to 118% of GDP in 2033, CBO said. Spending on the debt’s net interest is expected to grow to 2.4% of GDP this year, almost a total percentage point increase from its level in 2021, as higher interest rates raise the cost of borrowing for the government. CBO said that net interest payments will reach 3.6% of GDP in 2033.

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Beyond the budget, the agency painted a portrait of an economy that will cool considerably this year as unemployment rises and inflation stays elevated. GDP will expand just 0.1% this year, the CBO said. It said the unemployment rate would increase to 5.1% at the end of the year. That would be an overall increase from the January rate of 3.4%, the lowest in 53 years.

The report projects that the Federal Reserve would further increase its benchmark rate early this year to reduce inflation and expects the central bank to begin cutting interest rates at the end of 2023 as unemployment rises.

Inflation will remain somewhat elevated through 2023 before moving to near the Fed’s 2% target later this decade. After this year, economic growth will pick up, and the unemployment rate will decline, the agency said.