With Republicans now controlling the House, and Democrats controlling the Senate and Presidency this gridlocked political stage could be set for a similar debt ceiling debate as in 2011. That rocked financial markets and lead to a downgrade of the U.S. government’s debt rating. Reaching the debt ceiling is expected later in 2023, though the precise timing is debated.
When Will The Debt Ceiling Be Reached?
The timing of hitting the debt ceiling is not known precisely, but current estimates put it in some time second half of 2023, with the usage of extraordinary measures potentially pushing a hard deadline back closer to the end of the year.
The fate of the U.S. economy also has an impact. Recessions often increase government debt. If we see a 2023 recession it’s possible that the debt limit is reached relatively sooner. It’s also possible that in a recessionary environment, delays on raising the debt ceiling may have greater economic impact.
Different Estimates On Debt Limit Timing
Specifically, the Bipartisan Policy Center estimated as of June 2022 that the date for hitting the debt ceiling limit is “no earlier than the third quarter of 2023”. The Committee for a Responsible Budget similarly see the deadline coming after July 2023 based on October 2022 estimates.
Extraordinary Measures Could Add Several Weeks
However, the government has historically been able to continue to function for a period of weeks after reaching the debt ceiling. For example, in 2021, Treasury Secretary Janet Yellen, estimated that the government could continue to operate for approximately 11 weeks after the debt ceiling was hit, due to usage of extraordinary measures.
However, that analysis was based on chosen strategies and the specific weekly movements of revenue and expenditure during that fall 2021 period. Also, these extraordinary measures nonetheless impact certain activities of the U.S. government, even though the government can still broadly function.
For example, in 2021 the investment activities of certain government retirement, disability and benefits funds were impacted by extraordinary measures. In addition, the government sold certain investments earlier than it otherwise would have.
Some have also argued that the government could go further, perhaps invoking the 14th amendment, or minting an enormously high-value coin as further strategies to side-step debt ceiling issues. However, these ideas are untested and are unlikely to bring much comfort to credit markets.
The recent protracted process for confirming Kevin McCarthy as House Speaker may have knock-on impacts for the debt ceiling negotiations. As a concession to become Speaker, McCarthy apparently agreed to material government spending cuts.
The terms of these potential cuts have not been disclosed in any detail. Still, they do appear to cut government spending back to fiscal 2022 levels, this, and slim majorities for both parties in the House and Senate, will likely complicate negotiations for raising the debt ceiling in 2023. That’s because Democrats have been historically unwilling to agree to similar cuts to those which McCarthy has apparently promised his own party.
The damage that can be done to the stock and bond markets from brinksmanship over the debt ceiling debate is historically evident. During 2011, the debt of the U.S. government was downgraded from AAA to AA+ by S&P, and the S&P 500 sold off over 10% over the period. Of course, the markets ultimately recovered, by the credit rating of the U.S. government has not to date.
Nonetheless, those relatively severe issues for financial markets in 2011 have not prevented various subsequent last-minute debates over the debt ceiling in recent history. 2023 may see another episode of this political brinkmanship, but the debt ceiling likely won’t be reached until the second half of the 2023.