On September 21, the U.S. House of Representatives passed a Continuing Resolution (CR) that would fund the government until December 3. The measure was designed to avoid a government-wide shut down that would have occurred on September 30 with the end of the 2021 fiscal year. The measure passed by a 220-211 party-line vote, with Democrats voting in the affirmative and Republicans voting against the measure. The CR also included an extremely important provision that would suspend the current $28.4 trillion debt ceiling until December 2022, a move that would avoid the risk of the U.S. defaulting on its debt.
On September 30, the last day of the fiscal year, the Senate stripped out the debt ceiling provision and passed the CR. The House then passed the Senate version and President Biden signed the bill into law with just hours to spare. Because the Republicans hold 50 seats in the Senate and stood in united opposition to raising the debt ceiling, Senate Democrats did not have the 60 votes necessary to overcome a filibuster. The Senate Republicans’ decision to block the debt ceiling provision leaves the country’s ability to borrow unresolved just 18 days before the next major fiscal deadline.
Before December 3, Congress must adopt another short-term fix or pass a dozen appropriations bills that fund federal agencies through the 2022 fiscal year. As Congress is unlikely to be able to pass the funding bills, another CR is all but inevitable.
The “debt ceiling” is set by Congress to limit the federal government’s ability to exceed an agreed upon amount of debt. When the debt ceiling is reached, the Treasury Department cannot spend additional funds. Unless a solution can be found before the ceiling is reached, the government would shut down and the U.S. will default on its Treasury Bonds for the first time in America’s 245-year history.
Such a default could cause a global economic crisis. U.S. Treasury Bonds have been the safest financial products that global investors can purchase. Investors, including financial institutions, foreign governments, institutional investors, and retail investors alike look to Treasuries as a form of safe investment that has next to no chance of defaulting. The bonds are backed by the “full faith and credit” of the United States and if that trust is breached the bond rating of U.S. Treasuries would tank.
Senate Minority Leader Mitch McConnell’s (R-KY) and the Republicans opposition to raising the debt ceiling is purely political. McConnell believes that the Republican base is viscerally opposed to raising the debt ceiling. Republicans are also opposed to President Biden’s recent $3.5 trillion proposal that focuses on welfare, education and climate. Because there is no Republican support for President Biden’s proposal, Democrats will be forced to use the complex and cumbersome budget reconciliation process, an arcane Senate Rule that allows certain budget-related proposals to pass the Senate by only 50 votes. McConnell is holding the debt ceiling hostage – and risking default – as a negotiating tactic aimed reducing the $3.5 trillion of new spending in any reconciliation package and the tax increases meant to finance that spending.
In order to use the reconciliation process to pass President Biden’s agenda, the Democrats will need all 50 of their votes. At least two Democratic Senators, Joe Manchin (D-WV) and Krysten Sinema (D-AZ) have been very public in saying that the $3.5 billion package is too large and must be significantly decreased to secure their votes. Negotiations among the Democrats continue.