FRANKFORT — The country may have stepped back from the “fiscal cliff,” but another bloody partisan fight in Washington looms in the next two months.
Sometime around the beginning of March, the government will reach its statutory borrowing limit, needing to issue more debt to finance spending already approved by the Congress. Without an increase in the debt ceiling, the government won’t be able to pay its bills.
Congressional Republicans, led by Sen. Mitch McConnell, have vowed to withhold approval to raise the limit without concessions on spending cuts from Democratic President Barack Obama, who just got higher tax rates for the wealthy in a showdown with Republicans.
But Obama has said he will not negotiate on the debt limit. Failure to raise the limit would essentially mean the United States – generally regarded as risk-free by investors – will be in default and many warn that will send the world economy into a tailspin.
“We can’t not pay bills that we’ve already accrued,” Obama said this week. “If Congress refuses to give the United States government the ability to pay these bills on time, the consequences for the entire global economy would be catastrophic – far worse than the impact of a fiscal cliff.”
But in an op-ed on Yahoo News and in a Senate floor speech Thursday, McConnell vowed to fight an increase in the debt ceiling without spending cuts.
“We simply cannot increase the nation’s borrowing limit without committing to long overdue reforms to spending programs that are the very cause of our debt,” McConnell said in the Thursday op-ed.
Raising the debt limit was once a formality – it doesn’t increase government spending by itself. Rather it authorizes the executive branch to issue bonds to pay for spending already authorized by Congress. Congress has raised it 11 times since 2001, most recently last August.
But in 2011, the president and Congress were unable to reach an agreement on spending and the debt limit until the last minute. The government came within an eyelash of defaulting, prompting a couple of major bond rating agencies to lower the credit rating of the United States – the first time that ever happened.
According to the Bipartisan Policy Center, that cost American taxpayers an extra $18.9 billion in higher interest payments.
U.S. Rep. John Yarmuth, D-Louisville, says failing to raise the ceiling would have dramatic impact on the lives of ordinary people but many of them don’t understand the risk.
“What people don’t understand is that if you don’t raise the debt ceiling, government spending on day one is cut automatically by 28 percent,” he explained.
“That means if you continue to send out Social Security checks and pay doctors who provide care for Medicare and pay veterans’ benefits, then you have to cut the rest of government spending by about 70 percent,” Yarmuth said. That’s defense, education and all other discretionary spending.
He said such a spending cutback would dwarf the consequences of cutbacks in the fiscal cliff which even Republicans feared would push a fragile economic recovery back into serious recession.
“You’d return the economy almost immediately to 2009 conditions when we were losing 700,000 jobs a month,” Yarmuth warned.
David Adkisson, president of the Kentucky Chamber of Commerce, said the business community generally sides with those who want to cut spending, especially on entitlement programs like Medicare, Social Security and Medicaid which are “unsustainable.”
Business wants “a grand bargain” but Adkisson expects Republicans will use the debt ceiling debate as “leverage for cutting spending, specifically entitlement programs,” Adkisson said.
But he said business people are worried about the uncertainty created by another standoff like 2011, something which could damage the economy, increase “business uncertainty and anxiety” and adversely affect investment and hiring.
“At the end of the day, the business community is pragmatic and business people want to see results,” Adkisson said.
But in his Thursday op-ed, McConnell said Congress “cannot simply increase the nation’s borrowing limit without committing to long overdue reforms to spending programs.”
Obama may not want to negotiate the debt ceiling, McConnell said, “but it’s a fight he is going to have.”
McConnell isn’t alone. Prominent Republican members of Congress, including House Speaker John Boehner, have said in the wake of the tax agreement that they intend to hold the debt ceiling hostage to spending cuts.
Obama hasn’t said how he plans to continue government operations if he can’t secure Congressional approval to raise the debt limit, but some argue Section 4 of the 14th Amendment to the U.S. Constitution gives him authority to continue issuing government bonds.
The first sentence of Section 4 reads: “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.”
Legal scholars disagree on whether the president can invoke that section to unilaterally increase the debt or if such action would be upheld by the U.S. Supreme Court.
Yarmuth said Obama has previously said he doesn’t want to invoke the amendment and that Vice President Joe Biden this week told House Democrats Obama hasn’t changed his stance.
“But I think that has to be part of a fallback position if Republicans try to use the debt ceiling as leverage,” Yarmuth added.