Recent announcements that the nation could face default as early as June 1 have heightened concerns over the impact of default—or even a close brush with default—might have on the economy. On January 19, Treasury Secretary Janet Yellen informed Congress that the federal government had hit the debt ceiling—a statutory limit on its ability to borrow to finance the ongoing obligations of governing. The Treasury Department is currently deploying “extraordinary measures” to manage cash flow and keep borrowing within the limit to avert default. Experts across the political spectrum agree that the consequences of default—or even a near brush with default—would be severe for the U.S. economy and the global financial system. Potential economic consequences of default include: recession and a sharp rise in unemployment; chaos in financial markets; and lasting damage to U.S. leadership in the global economy. These consequences and the harm they would cause for Americans and the nation are not inevitable and can and should be averted by swift congressional action to raise, suspend, or eliminate the debt limit.
Default could occur as early as June 1
A number of factors affect the so-called “x-date,” the date when the Treasury Department will exhaust the various cash and debt management options available to stay under the debt limit. While estimates of the x-date are always subject to some degree of uncertainty, this year’s x-date has been subject to greater uncertainty. A number of factors affect the x-date and make accurate projections challenging, including the fact that the Internal Revenue Service has extended the 2022 tax filing deadline to October for a number of states—most notably California—due to weather related disasters.
On May 1, Treasury Secretary Yellen informed House Speaker Kevin McCarthy (R-CA) that the federal government could reach the x-date as early as June 1. At that point, absent congressional action to raise, suspend, or eliminate the debt ceiling, the nation would default on its legal obligations. On the same day as Yellen’s announcement, the Congressional Budget Office released a statement noting that the projected x-date remained uncertain but that:
… [i]f the debt limit is not raised or suspended before the extraordinary measures are exhausted, the government will ultimately be unable to pay its obligations fully. As a result, the government will have to delay making payments for some activities, default on its debt obligations, or both.
The House Republican leadership has threatened to hold the debt ceiling hostage
House Speaker McCarthy and other leaders of the House Republican majority have threatened the nation with default in order to push for a wide range of radical policies. Some House Republican members have gone so far as to suggest that default would be acceptable and some conservative thought leaders argue that default would be desirable. On a party line vote in March 2023, the House Ways and Means committee advanced a measure that would have the Treasury pay some—but not all—of the nation’s bills using available resources in lieu of raising the limit. However, as a prior Center for American Progress analysis documents, such a measure simply amounts to default by another name.
Default would have catastrophic consequences
Economic experts from across the political spectrum agree that a default on the nation’s obligations would have catastrophic consequences for the United States and around the globe. These consequences would be long lasting—undermining financial markets’ confidence in the stability of the United States—and could include widespread job loss and higher costs for governmental and consumer borrowing due to higher interest rates. Default would result in lasting harm to the economy, as explained below.
- Moody’s Analytics has projected that a default lasting even a few weeks could cause a recession comparable to that during the global financial crisis, resulting in the loss of nearly 6 million jobs and a stock market fall off of almost one-third, which could wipe out $12 trillion of household wealth. The impact of a default-induced recession would be exacerbated by the fact that the federal government would have limited ability to deploy counter-cyclical policies that are typically used to cushion the impact on households and businesses and jump-start economic activity.
- A default would undermine consumer and business confidence which, in turn, could reduce the spending that is fundamental to economic growth. Default would also weaken investor confidence, leading to a reduction in stock prices, reducing the value of families’ retirement and other savings. During the 2011 debt ceiling debate, for example, the S&P 500 lost about 15 percent of its value.
- A default would almost certainly result in a downgrade in the credit rating for U.S. government securities, which would, in turn, lead to higher interest rates, raising the cost of borrowing. This would reduce economic activity by crimping business investment and increasing the cost of major purchases such as homes and vehicles—as well as the cost of credit card debt—for American families. This would also increase the cost of future federal borrowing. Investor concern over even the possibility of default could result in a downgrade, which would likely result in higher interest costs. In an April 23 statement, for example, FitchRatings noted, “If, ahead of the X-date, we were to assess the risk of a default as having become more material, the US’s rating would likely be placed on Rating Watch Negative and further rating action could be considered. If the limit were not raised or suspended in time to avoid a default, the US’s rating would be moved to ‘RD’ (Restricted Default). Affected Treasury securities would carry a ‘D’ rating until the default was cured. Prioritising debt payments to avoid an immediate default, if this were possible, might not be consistent with a ‘AAA’ rating.”