The 2020 Mid-Year Economic Update_long

Bracing for More Debt Limit Debate

Not raising the debt ceiling will likely dampen government payments, new awards.
PublicPolicy-blog

In the words of Yogi Berra, "It's déjà vu all over again" as Congress and the President prepare to go head-to-head over the debt ceiling. Under current conditions, the U.S. will reach its borrowing limit next month. And we're hearing the same arguments about it today that we heard back in the summer of 2011 – a debate which resulted in the downgrade of America's credit rating.

Right now, it appears we are still in the bluster stage, with each side drawing dramatically different lines in the sand. In a statement released Saturday, the White House said it "won't tolerate Congressional Republicans holding the American economy hostage again…" while the House Republicans continue to push for spending cuts equivalent to the increase.  

"I think it is possible that we would shut down the government to make sure President Obama understands that we're serious," House Republican Conference Chairwoman Cathy McMorris Rodgers of Washington state told Politico. "We always talk about whether or not we're going to kick the can down the road. I think the mood is that we've come to the end of the road."

While those words may sound good – I'd like to be at the end of the road for this never-ending argument and I don't like being held hostage – it's not necessarily a realistic way of approaching the debt-limit issue. As James Fallows wrote in The Atlantic, there are "two sentences that should be a part of all discussion of the debt ceiling: Raising the debt ceiling does not authorize one single penny in additional public spending. For Congress to 'decide whether' to raise the debt ceiling, for programs and tax rates it has already voted into law, makes exactly as much sense as it would for a family to 'decide whether' to pay a credit-card bill for goods it has already bought."

The potential effects of not raising the debt ceiling are the same today as they were in August 2011: Interest rates will rise for any money borrowed by the U.S., increasing the overall money we as a country have to repay; payments to government employees and government contracts will be delayed; and new contract awards may be put on hold.

Read how distributors are adapting business strategies to government spending shifts.

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