USA’s looming debt crisis: Biden’s big spending has hit the ceiling… now the crunch time has arrived, says ALEX BRUMMER
President Biden has in recent times received high praise for his big spending – aimed at transforming the US economy.
Admirers have even gone so far as to suggest the fiscal largesse, approved when Democrats had a majority in the House of Representatives, made him the natural successor to former ‘big government’ Democrats Franklin D Roosevelt and Lyndon B Johnson, authors of the New Deal and the Great Society respectively.
Biden has been spending as if there was no tomorrow. Among other things, his administration forgave $400billion of student debt, passed a $1trillion infrastructure renewal bill and an ‘Inflation Reduction Act’ which spends $397billion on climate change projects (much to the consternation of the UK and EU).
Hey big spender: President Biden’s admirers suggest his fiscal largesse makes him the natural successor to former ‘big government’ Democrats Franklin D Roosevelt and Lyndon B Johnson
He finished 2022 with a flourish in the shape of a $1.7trillion spending bill.
Republicans supported a package which included an enormous lift in defence spending and billions of assistance to Ukraine.
The crunch time has arrived for the US as largely unfunded spending hits the debt ceiling.
Technically, the US reached its $31.4trillion borrowing limit yesterday. If a debt crisis or potential default is to be averted, the US Treasury Secretary Janet Yellen will be required to hit the emergency button delaying a range of programmes.
With the budget deficit now 120 per cent of US output, third-highest in the G7 after Japan and Italy, the coming crunch is impacting the dollar. It is among the reasons that sterling recently has staged a revival.
London-based spectators might manage a wry smile. Yellen was among the most vocal critics of Trussonomics last September, contributing to market mayhem.
Yet British debt to GDP at 97 per cent is comparatively less threatening.
The difficulty for Biden, the US Treasury and global markets is that the change of control in Congress, which landed Republican Kevin McCarthy of California in the Speaker’s chair, means fiscal policy is now in hostile hands.
The mid-term election results in November were seen as a victory for Biden and the Democrats because Trump-style populism was rolled back. Maybe, but a more enduring legacy may be a budgetary stalemate.
Fiscally conservative Republicans, the broad equivalents of Rishi Sunak and Jeremy Hunt, want to halt the big spending steamroller and are determined enough to force a showdown if push comes to shove.
Yellen has identified some $428billion of stop-gap savings, such as suspending some payments into the civil service pension funds. Imagine how well that might go down in Whitehall!
She could also prioritise debt payments but that would leave the Pentagon whistling for cash amid a major war in Europe and a strategic game of chess in the South China Sea.
Such measures could allow the US Treasury to pay its bills until June.
Some forecasters believe, with clever accounting, Yellen could delay the trigger point until the autumn. Debt stalemates and having to send federal workers home, because there is no authority to pay, are not uncommon in Washington.
The big worry is that politics are so raw and divided on Capitol Hill that it could be 2011 all over again, when the country came within a whisker of default.
Standard & Poor’s cut by a notch the USA’s credit rating and, as significantly – from an investor viewpoint – the S&P index fell 15 per cent with the shares of companies most exposed to American government spending tanking 25 per cent.
BAE Systems which earns a chunk of money from the US Defense Department and other UK firms with exposure to US aerospace, such as Melrose-owned GKN Aerospace, potentially could find themselves in the secondary line of fire.
It is not in the interest of Congress, the US government or the global economy to allow a debt default to occur.
In Davos this week the IMF reaffirmed that world output is feeble and it expects growth in 2023 to decelerate to 2.7 per cent from 3.2 per cent last year.
As was seen at the time of McCarthy’s election, which took a record 15 ballots over four days, Capitol Hill is divided.
Unruly Right-wing lawmakers have been drafted by the Speaker as chairman of committees. Troubling times lie ahead as the US wrestles with the Biden debt overhang.