However, in the absence of a new political agreement on the amount the country can legally borrow or the suspension of the legal debt limit, the US could run out of money to pay its debts sometime after that.
This is not the first time there has been a dispute over the debt ceiling. It has been the subject of rows, on and off, for decades. Raising the debt ceiling was among the disputes that caused two shutdowns of the federal government in late 1995 and early 1996. Another row took place in 2011, spooking financial markets and prompting Standard & Poor’s to issue the first-ever downgrade of the US government’s credit rating.
In December, the right-wing Heritage Foundation urged the new Republican-controlled House not to give an inch on the debt ceiling. “With the nation at unprecedented levels of indebtedness, the choice in this fight is a stark one: a path toward stability or fiscal Armageddon,” it said. Ms Yellen maintained that, in the past, even threats of a default had caused “real harms” including the only credit rating downgrade in US history in 2011. In September 2021, when there was a previous standoff between Democrats and Republicans over the debt ceiling, Moody’s Analytics warned a prolonged crisis could lead to a full recession, wiping out billions of dollars in economic growth and eliminating up to six million jobs in the US.
McCarthy has signalled Republicans are interested in a deal with Biden that would impose a spending cap in exchange for temporarily raising the debt ceiling. McCarthy said he hoped to “sit down with [Biden] early” to work through fiscal issues including the debt ceiling.