While the potential effect on the economy is the main concern should political leaders fail to suspend or raise the federal debt ceiling, the impact on government operations is another consideration; both are unexplored territory although studies have suggested that unlike in a funding lapse, there would not necessarily be a partial government shutdown.
The Treasury Department has projected that the current ceiling will be hit October 18, when the leeway provided by financial maneuvers that have been used in recent months will have been used up. However, pressure is building to head off a potential default on the national debt well before that date, given the negative impact already being seen in the financial markets.
Congress remains at a stalemate over the issue, though, with the House having voted several times to suspend the limit into December 2022 only to have the measure stall in the Senate, where it would need support of at least 10 Republicans under that chamber’s standard rules. Republicans continue to insist that the debt ceiling is for Democrats to deal with since they control the White House and both chambers of Congress, while Democrats point out that the issue traditionally has been bipartisan, as has the spending that led to the debt.
The next step could be for Democrats to try for enactment under the “reconciliation” process that would not require any Republican support there, although that is complex and time-consuming. Other options also are under consideration.
As the government similarly approached debt ceilings in past years, some analyses said that even in a default situation, the government could continue paying some expenses out of the money that would continue to come in from taxes and other sources. Meanwhile, the government would take on obligations to eventually pay for spending beyond that income.
Exactly how it would handle spending—including to pay the salaries of federal employees and annuities of retirees—is uncertain. The Congressional Research Service for example said that options could include paying a prorated amount toward every one; paying on a first-in, first-out basis; and paying first on other priorities, such as on contracts that would trigger late-payment penalties against the government otherwise.
However, CRS and others have said that the potential impacts on the economy of defaulting on the debt would outweigh those considerations. A recent CRS report lists those as including “reduced ability of Treasury to borrow funds on advantageous terms, thereby further increasing federal debt; substantial negative outcomes in global economies and financial markets caused by anticipated default on Treasury securities or failure to meet other legal obligations; acquisition of interest penalties from delay on certain federal payments and transfers; and downgrades of U.S. credit ratings, which could negatively impact capital markets.”