Five Ways Joe Biden Can Outmaneuver Kevin McCarthy Over the Debt Ceiling

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President Joe Biden and House Speaker Kevin McCarthy met in the Oval Office on Monday evening to discuss a potential spending deal to raise the debt ceiling, but have so far yet to reach an agreement.

Biden told reporters that the meeting was productive and all had agreed that a “default is not really on the table.” Neither side wants to see the U.S. fail to pay its debts, but while House Republicans want to rein in spending, Biden does not want to see his agenda’s funding cut.

Alarm bells have been ringing over the debt ceiling since Treasury Secretary Janet Yellen warned that the U.S. was estimated to reach its debt limit as early as June 1—risking a default on the $31.5 trillion it has borrowed.

This could have a deep economic impact around the globe and would make it more expensive for America to borrow in the future, as U.S. government bonds would no longer seem as safe a bet as they have historically.

U.S. President Joe Biden, right, meets with House Speaker Kevin McCarthy, left, in the Oval Office of the White House in Washington, D.C., on May 22, 2023. Biden and McCarthy met to discuss raising the debt limit in an effort to avoid a default by the federal government.
Drew Angerer/Getty Images

Biden and McCarthy now face committing to mutually palatable spending cuts to raise the debt ceiling. Both have framed an agreement as crucial to avoiding default.

However, experts say there are other options at the government’s disposal to avoid a default without having to agree on raising the debt ceiling—but these may be even more politically unpalatable.

Cut Spending

Say this month you earn $2,000, and want to go on a holiday that will cost $1,000. But you also have to pay $1,200 in rent. To avoid problems with your landlord, you may choose to reduce your holiday budget to $800.

This is in microcosm one option for Biden: by freeing up money already committed to spending, those funds could be used to settle debt obligations due shortly, avoiding a default. But Biden’s vision for America’s recovery after the coronavirus pandemic has been premised on large spending appropriations agreed when Democrats controlled the house in 2022.

“Imagine if you’d said the following: ‘I’m going to cut spending if you don’t raise the debt ceiling,'” Saikrishna Prakash, professor of constitutional law at the University of Virginia, told Newsweek. “Well, that’s exactly what the Republicans want, and that’s exactly what the Democrats don’t want. But that would be a solution to this problem no less plausible than what they’re doing now.”

Biden could limit spending on his own terms by deferring funding, allowing him to choose which programs to defund and by what amount. This would only extend to the end of the fiscal year, September 30, and any rescinding of funding that has already been appropriated would require Congressional approval beyond that.

However, this would see the federal government’s budget reduced to its tax revenues alone, which are projected to account for just 77 percent of spending this financial year, while those revenues would also have to pay off debt interest.

Kenneth Rogoff, a macroeconomist at Harvard University, told Newsweek that he saw the economic impacts of this as “modest” if it were to last for a matter of hours of weeks, but added: “The impact on the economy would be massive if it goes on for a year and we can only spend what we tax, which is a big adjustment for the United States and very painful, for sure.”

“They will have to shut down parts of the government because there is no money,” he noted.

Biden could spin this as saying his hands are tied by Republican intransigence.

“If he goes to the bank account and there’s no money there, he’s not exactly cutting spending,” Prakash said. “He just doesn’t have the money to do that, which Congress told him to do in October.”

Without being able to issue new debt, if cuts to spending are to be shallower than what would be required on the federal government’s current revenue alone, one option is to raise the amount of revenue the government gets.

Raise Taxes

If Biden wants to maintain federal spending at its current levels while keeping debt under the ceiling, the government could raise taxes to meet those commitments and pay off interest on its pre-existing debt.

Federal revenues are projected to total $4.8 trillion in the fiscal year 2023, according to the Congressional Budget Office, while its outgoings are expected to reach $6.2 trillion. So the government would have to increase taxes by around 30 percent to make up this shortfall.

In theory, the president has the authority to raise taxes without congressional approval, but at a time when the cost of living remains high, Biden might not want to ask Americans to significantly increase their tax contributions just to keep his agenda ticking over.

He could raise taxes while cutting spending—lessening the severity of both moves—but Republicans, as the party of low taxes, would only like to see the latter.

“Notice the only thing they’re talking about is raising the debt ceiling,” Prakash remarked. “They’re not talking about the president raising taxes or the president cutting spending.”

Doing so suddenly could also have an impact on the U.S. economy, which has seen shrinking growth in the last three quarters, Bureau of Economic Analysis figures show.

“If you had a plan to have higher taxes and lower spending over ten years… that I don’t think has such a big effect,” Rogoff said. “But when you do it suddenly, unexpectedly overnight, it’s very painful and traumatic. It’s the absolute unpredictability, suddenness, magnitude that will lead to a lot of problems.”

Biden Issues His Own Debt

Biden has suggested he has the “authority” under the 14th amendment to issue new debt beyond the Congress-imposed ceiling. This would, some argue, allow him to raise new funding to continue government spending at its current levels while meeting the government’s debt obligations.

Section 4 of the 14th amendment states: “The validity of the public debt of the United States, authorized by law…shall not be questioned.” Advocates of Biden’s view say that the country’s existing debts were legally authorized and so failing to raise the debt ceiling would be failing to honor those debts.

There is debate among constitutional lawyers about whether Biden’s interpretation of the amendment is valid, and there are questions as to whether lenders would be as willing to invest in a bond that was not backed by Congress, which according to the constitution holds the purse strings.

The unilateral move is therefore likely to face legal challenges if it were utilized. But with less than 10 days until Yellen’s debt limit deadline, Biden could move to avoid default in the knowledge any litigation would take time to resolve.

Rogoff described it as “a progressive fantasy to think [the constitution] requires the president to issue new debt to cover expenses where taxes are insufficient.”

“It’s one thing to say you have debt and you’ve promised to honor it; it’s another thing to say you’re going to issue another trillion dollars in debt because you want to write down student loans and you’re going to honor that,” he added.

Prakash said the current political chasm was “a spending crisis masquerading as a debt default crisis.” He is among the constitutional lawyers who believe the 14th amendment does not give Biden the grounds to issue his own debt without Congressional approval.

“The Republicans don’t want to issue debt to pay for all the stuff the Democrats appropriated in the fall, and they’re basically renegotiating, so to speak, the spending package that was negotiated in the fall,” he said. “And the Democrats are saying: ‘you can’t do that, you have to fund everything going forward and the constitution requires that.’

“But the constitution says nothing about what to do when you appropriate ‘x’ and there’s not enough money in the Treasury to cover all your appropriations.”

Pay Interest and Roll Over Debt

An individual in debt has two costs to consider: the interest that needs to be paid on outstanding debt, and the principal amount borrowed being repaid when the loan term ends. The Treasury could, come June 1, continue to pay interest on its debt but keep its principal debt at the same level, even as bond repayments come due.

While Rogoff said forcing principal payments to roll over would be a “technical default,” as lenders would still not have their money on time, Prakash said there is a “trick” to prevent this.

Effectively, it is borrowing from Peter to pay Paul: if a $1,000 government bond comes due today, the Treasury could retire that bond and then issue a new $1,000 bond—keeping the total debt the same as before while honoring the first bonds.

“They will be able to pay off the bonds and then reissue them, because in so doing they are not exceeding the debt ceiling,” Prakash said.

According to his estimates, the federal government owed $62 billion in interest in April, while tax revenue was $639 billion. In March, the Treasury paid $67 billion in interest while receiving $313 billion in taxes.

“Rolling over means borrowing new debt to pay the old debt—but as long as you’re under the ceiling you can do that,” Rogoff said. However, he noted it “doesn’t leave you rope” for any government spending beyond its current budget.

“Right now, they could continue rolling over that debt—paying the debt and issuing new debt—they just couldn’t issue net new debt,” Prakash said. “They need to issue net new debt, or cut spending, or raise taxes to fund all the government spending programs in the fall.”

Kick It Into the Long Grass

At present, both Biden and McCarthy have “got to come up with something face-saving” in negotiations “where both can go back and with some credibility claim that they’ve won the argument,” Alex Waddan, associate professor in politics at the University of Leicester, in the U.K., commented.

“That seems to me [to be] where the sticking point is, because it’s difficult to come up with a scenario that gets you there,” he said.

One option that would absolve Biden of the current crisis, he suggested, was “trying to find a way they can kick it into the long grass a little bit, and both claim victory around how that’s been done.” This could take the form of an extension agreed with “some sort of bipartisan commission to look at future potential budget cuts.”

However, McCarthy has already dismissed the idea of a short-term extension to the debt ceiling to stave off a default, Bloomberg reported on Sunday.

“Bipartisanship doesn’t seem to be the fashionable thing in Washington at the moment,” Waddan noted.

Newsweek approached the White House and the office of the House Speaker via email for comment on Wednesday.

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