CBO Warns Catastrophic Default Imminent if Debt Ceiling Isn’t Raised

If the United States does not raise its debt ceiling, it can expect to default on payments between July and September, the Congressional Budget Office (CBO) warned on Wednesday.

In what the CBO calls “extraordinary measures” in order to meet the government’s obligation, the Treasury Department was forced to move funds around after the debt ceiling was reached again on Jan.19 after the initial raise by $2.5 trillion to a total of $31.4 trillion on December 16, 2021.

On that occasion, a debt issuance suspension period was announced during which, under current law, the Treasury can take well-established extraordinary measures to borrow additional funds without breaching the debt ceiling.

However, according to this new projection from the CBO, the band-aid measures if the Treasury will no longer be viable this summer and the government will have to delay making payments for some activities, default on its debt obligations, or both if Congress does not raise the ceiling once again.

There could be a cascade effect resulting in a recession – or even a depression- if the US Government defaults on its debts, pushing inflation to rise even faster which would make borrowing more expensive, will stifle international trade and, when US debt payments stop, large companies holding the debt could have their balance sheets upended.

The debt, which now sits at $31.4 trillion, is a result of the behavior of both parties since 1960, forcing Congress to act 78 times – 49 of which came under Republican presidents- to allow the government to incur more debt by raising, extending or changing the definition of the debt ceiling.

According to the CBO, the fact that tax revenue is not keeping up with spending is at the heart of the problem and the gap between the two is getting worse with the current deficit equating to 5.3% of the US total GDP – significantly higher than the average 3.6% deficit over the last 50 years- and that number is expected to rise to 6.9% by 2033.

CBO expects the annual budget imbalance to reach $1.4 trillion in 2023 and, according to estimates, it is likely to increase to $2 trillion from 2024 to 2033.

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