The Dire Consequences of a U.S. Debt Default

The U.S. federal government has reached the limit on the amount of debt it is legally allowed to accrue. Congress sets this amount, known as the debt limit, and has the power to raise it to meet the country’s financial obligations. Once the debt limit is reached, the Treasury Department has a limited number of tools, called extraordinary measures, that allow the Treasury to keep paying the government’s bills.  

Latest Updates: 

• On May 1, Treasury Secretary Janet Yellen sent a letter to Congress indicating that the Treasury could exhaust extraordinary measures and be unable to pay all the government’s bills as soon as June 1. The same day, the non-partisan Congressional Budget Office (CBO) confirmed that Treasury could run out of funds in early June.  
• On May 9, President Biden and Congressional leaders met to begin negotiations on addressing the debt limit crisis. The Chamber has called on all parties to prioritize areas of mutual agreement, including permitting reform and an agreement on discretionary spending caps, both of which can improve the federal government’s fiscal outlook. 
• The President and Congressional leaders met at the White House on May 16, with talks progressing and lawmakers expressing optimism. Our statement: "With just two weeks to go before hitting the debt limit, we are pleased to see the scope and structure of the negotiations narrow. We believe there is a path forward on a bipartisan deal that lifts the debt limit and makes important reforms to improve our nation's fiscal health."
• On May 19, the Chamber sent a letter to President Biden outlining why using the 14th Amendment isn't a viable option to address the debt limit crisis. Read more here.
• Congressional leaders and the President met on May 22. A follow-up date has yet to be announced.

Why Does Defaulting Matter?​

If Congress doesn’t increase the debt limit before funds run out, the government would be unable to pay its bills, resulting in a first-ever default, which would be catastrophic for the U.S. economy. We have become more concerned that there could be a first ever default on the federal government's debt because of the short timeframe and the increasing risk of miscalculation. 

CHAMBER UPDATES: See our debt limit updates to members from April 16, May 2, and May 12.

What Happens if the U.S. Defaults?

It is impossible to overstate the negative consequences that would occur if the United States were to default on its debt.   

The U.S. economy and global financial system are all underpinned by the idea that the U.S. government – unlike others around the world – always pays its bills. Investments in U.S. debt are considered “risk-free”, which means the federal government pays less to borrow money. All other debts and their interest rates are based off the risk of that debt relative to risk-free treasuries. It is also a principal reason that the U.S. dollar is the global reserve currency, giving the U.S. both economic and national security advantages (advantages that China, for example, is looking to undermine through a competitor to the dollar).  

Defaulting would mean that the U.S. government no longer always pays its bills. Treasuries would no longer be risk-free.  Interest rates for the government and everyone else would rise as the financial system tries to sort itself out. The role of the dollar globally would be weakened, perhaps permanently. Most analysts believe this would result in an immediate recession with long-term negative effects.  

Some say the federal government can prioritize which payments to make after a default. The truth is the federal government cannot simply pick and choose which legal obligations it is going to follow and which ones it doesn't. That is simply default by another name. 

By the Numbers  

• $31.381 trillion: The current federal debt limit, which was last raised in December 2021.  
• 102: The number of times the U.S. government has increased the debt limit since World War II. 

Potential Policy Agreements

We believe there are three likely areas of agreement that could accompany an increase in the debt limit:  

1. Repeal of Unspent COVID Funding: The House-passed debt limit bill rescinds $56 billion in unspent, unobligated COVID funding. According to the Congressional Budget Office (CBO), most of the reductions would come from the Public Health and Social Service Emergency Fund and from infrastructure, rental assistance, community development, and disaster relief programs. Notably, the bill did not rescind funds, totaling approximately $316 billion, that are subject to legally binding obligations. Savings: $56 billion in budget authority. 

2. Discretionary Spending Caps: Currently there are no legal caps on federal discretionary spending (the approximately $1.8 trillion appropriated by Congress on an annual basis to operate federal agencies). In the absence of caps, CBO assumes that spending grows with inflation. The House-passed bill proposed to reduce discretionary spending by 8% next year and then increase spending by approximately 1% a year. This produced $3.6 trillion in budget authority savings over ten years. Congress and the administration could settle on any number of spending paths that could produce quite substantial savings. Click here to see illustrative examples. 

Even if the caps were only in effect for a year or two, they would produce savings over the ten-year period as a result of resetting the baseline at a lower level of spending.  

Because discretionary spending caps have been enacted as part of debt limit deals in the past, including in 2011, and because the administration and Congress will have to come to an agreement on top-line spending levels at some point this year anyway, we believe it is likely that an agreement on top line spending enforced by caps is enacted as part of a debt limit agreement. We would not rule out savings over ten years of $750 billion to $1 trillion 

3. Permitting Reform: Both Republicans and Democrats continue to indicate their support for reforming the federal permitting process. This week the administration released its priorities for permitting reform. Earlier this month, Republican Senators introduced their own permitting reform bills. Before that Senator Manchin reintroduced his bill from the last Congress. The bill passed by House Republicans also includes permitting reform.

While significant differences remain between the Republican and Democratic approaches, including with respect to electric transmission lines and meaningful NEPA reform, we believe those differences can be bridged in time to include a permitting reform package as part of a debt limit agreement.

While permitting reform itself is not a budgetary measure it will have implications for the cost of projects financed by both the private sector and the government. Lengthy permitting delays tie up capital and resources and increase project costs, including through inflation. A project that would cost X to build today will cost more to build in five years purely as a result of inflation.

To provide an illustrative example of the potential project savings, we calculated the possible inflationary savings from simply ensuring that projects would be permitted in no more than two years. The longer it takes today to get a permit, the greater the project savings from expediting the process. 

Click here to see examples.

Timeline for Action

Treasury Secretary Yellen previously indicated that the Treasury could exhaust extraordinary measures and be unable to pay all the government’s bills as soon as June 1.  

The Congressional Budget Office released its updated estimate finding:  

• “…there is a significant risk that at some point in the first two weeks of June, the government will no longer be able to pay all of its obligations,”  
• “That uncertainty exists because the timing and amount of revenue collections and outlays over the intervening weeks could differ from CBO’s projections,”  
• “If the Treasury’s cash and extraordinary measures are sufficient to finance the government until June 15, expected quarterly tax receipts and additional extraordinary measures will probably allow the government to continue financing operations through at least the end of July.”  

Given the likely time it will take for the House and Senate to process an agreement (for example we should not assume that there will be unanimous consent in the Senate to expedite passage), an agreement in principle likely needs to be reached between the administration and Congressional leaders by the end of next week in order to ensure enacted by June 1. 

What About Small Businesses?

The Debt Limit Stalemate and Your Small Business: Everything You Need to Know

Read more

Could the 14th Amendment Offer a Solution?

There has been renewed attention to the idea that the 14th Amendment to Constitution that provides that the public debt shall not be questioned could be invoked in order to allow the administration to issue new debt in order to meet the government’s obligations.  

We do NOT believe that the 14th Amendment provides an alternative to raising the debt limit.  

Most proponents of invoking the 14th Amendment skip over a key phrase in the amendment. Section 4 of the 14th Amendment reads in full:  

• “The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned. But neither the United States nor any state shall assume or pay any debt or obligation incurred in aid of insurrection or rebellion against the United States, or any claim for the loss or emancipation of any slave; but all such debts, obligations and claims shall be held illegal and void.” (Emphasis added)  

The key phrase is public debt “authorized by law.” Under current law, debt issued by the government is only allowed up to the amount specified in the debt ceiling, currently $31.4 trillion. Issuing debt above that amount is not authorized by law. Further, the power to “borrow money on the credit of the United States” is given to Congress (Article I, Section 8) and not the Executive.  

If the Treasury Department attempted to borrow money above the statutory limit in order to pay obligations of the government, the validity of that debt would immediately be called into question and subject to litigation. This would only compound the negative economic consequences of reaching the X date. 

Could a Discharge Petition Work?

There is renewed attention on the possibility that the House could act on a debt limit increase utilizing a discharge petition to circumvent the Republican Leadership. Democratic Leader Hakeem Jeffries circulated a Dear Colleague letter to members indicating their intention to utilize this process. Leaving aside the question of getting the support of 218 members, there are numerous timing hurdles that make this exceptionally difficult, if not impossible.

"A discharge petition doesn't lend itself to a fast approaching deadline like June 1st," says Tom Wickham, former Parliamentarian of the U.S. House of Representatives and Senior Vice President of State and Local Policy at the Chamber. "It is a lengthy and complicated process with a couple of different layover periods, and those layover periods use legislative days and not calendar days."

The scheduled legislative days remaining before the X date are few.  There's a seven legislative day layover after the introduction of this measure, which started on May 9th. Then the signature process begins.  If 218 signatures can be achieved, there is another seven legislative day layover before the Speaker has to schedule it for the floor.

Read more in our memo to Chamber members.

About the authors

Neil Bradley

Neil Bradley is executive vice president, chief policy officer, and head of strategic advocacy at the U.S. Chamber of Commerce. He has spent two decades working directly with congressional committee chairpersons and other high-ranking policymakers to achieve solutions.

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