Budget dispute in the USA: First trial of strength, then bankruptcy?

The new Republican majority in the US House of Representatives is determined: they do not want to agree to a further increase in debt – they want spending cuts. Does the dispute lead to insolvency?

It’s actually routine: the US Treasury Secretary is asking Congress to urgently raise the debt limit. Janet Yellen did that in fall 2021, now she’s doing it again.

But this time the request is particularly explosive. The Republicans have recently won a majority in the House of Representatives. You have troublemakers in the faction who almost thwarted the election of Kevin McCarthy as speaker. Above all, they name one goal as immovable: government spending must fall.

How the election result is interpreted

Republicans were elected at the midterms with a mandate to cut spending, says James Comer, chairman of the Oversight Committee, a powerful committee whose primary job is to scrutinize government. Comer stressed on the CNN television channel: “We will not give in until we see significant reforms in terms of government spending.”

Social spending at a glance

Republicans want to force the government to cut future spending, such as social spending. Only then do they want to raise the debt limit for current spending again. Speaker Kevin McCarthy said on Fox News his group is willing to negotiate with anyone who is also willing to work together – and he believes that could be the president.

But Joe Biden’s spokeswoman has rejected negotiations of this nature. Raising the debt ceiling “must not become a political game ball,” said Karine Jean-Pierre.

A few days remain

The current legal debt ceiling is $31.4 trillion. According to Treasury Secretary Janet Yellen, it will be reached this week. For a certain period of time, the state can then make do with postponing expenditure, for example delaying payments into pension funds. By June at the latest, however, the US was threatened with insolvency, Yellen wrote in a letter to Congress.

The consequences could be significant

In 2011, a newly elected Republican majority gambled away in debt ceiling negotiations until the United States’ credit rating was downgraded. Share prices plummeted, interest rates rose, and American taxpayers suffered billions in damage.

Will the finish line be missed?

Jack Lew was Secretary of the Treasury under President Barack Obama. In a CBS interview with the TV station CBS, the Democrat warns that Congress always tries to act only at the last possible moment. Now there is a risk that this finish line will be missed.

The financial markets and the global economy as a whole are currently particularly susceptible to fluctuations due to the consequences of the corona pandemic. And some Republicans have just demonstrated in the speaker election that they are ready for almost anything, said Lew. The former finance minister is therefore pessimistic. The work that has to be done now is very difficult. And the consequences that a failure would have “unimaginable”.

Most of the time it turns out fine

Optimists in Washington, on the other hand, point to the overall historical picture: since 1962, Congress has changed the debt ceiling around 80 times. Only once, in 2011, was the temporary downgrading of creditworthiness caused major damage. All other times it ended well.