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Democrats leave debt ceiling increase out of budget plan, setting Congress up for fall showdown

Treasury Secretary Janet Yellen testifies during a Senate Appropriations Subcommittee hearing to examine the FY 2022 budget request for the Treasury Department on June 23, 2021 at the US Capitol in Washington, DC.

Greg Nash | AFP | Getty Images

It’s all but certain Congress won’t raise the debt ceiling before the Senate leaves for summer recess, setting the stage for a bitter partisan face-off over the borrowing cap later this fall.

Some economists hoped Senate Democrats would include a debt ceiling increase in the $3.5 trillion budget proposal party leadership unveiled Monday morning.

Majority Leader Chuck Schumer, D-N.Y., and House Speaker Nancy Pelosi, D-Calif., hope to pass their budget — focused on climate change and poverty — with or without Republican support.

But the party’s budget left out any mention of the ceiling, meaning that the U.S. government will be near the brink of default when the Senate returns from its summer recess halfway through September.

It also means Democrats and Republicans will have to act fast next month to reach an agreement over one of the most fraught votes for any American politician.

Lawmakers in both parties dislike voting to raise or suspend the debt ceiling. That’s because campaign ads often spin a vote to prevent a U.S. default as evidence that the incumbent condones flagrant spending.

Treasury Secretary Janet Yellen sought to quell those fears Monday, when she again urged lawmakers to set aside their differences to avoid economic calamity.

“Increasing or suspending the debt limit does not increase government spending, nor does it authorize spending for future budget proposals; it simply allows Treasury to pay for previously enacted expenditures,” she said. “Failure to meet those obligations would cause irreparable harm to the U.S. economy and the livelihoods of all Americans.”

Neither Schumer’s office nor Pelosi’s responded to a request for comment. An aide to House leadership told CNBC earlier this month that discussions about the ceiling were ongoing, and that the party’s top lawmakers will not risk the full faith and credit of the United States.

Senate Minority Leader Mitch McConnell, R-Ky., underscored last week that the GOP would not support an increase to the ceiling if Democrats moved to pass their $3.5 trillion budget, and signaled the beginning of what’s expected to be a fierce partisan showdown in September.

Sen. Mitch McConnell and Sen. Chuck Schumer in the Oval Office on Sept. 6, 2017.

Kevin Lamarque | Reuters

“Let me make something perfectly clear: if they don’t need or want our input, they won’t get our help with the debt limit increase that these reckless plans will require,” McConnell said.

Republicans leveraged a looming default in 2011 to score concessions and budgetary cutbacks from the Obama administration.

In a worst-case scenario where the government defaults, U.S. Treasury bond holders could demand dramatically higher interest rates and set off a wave of higher borrowing costs ripping through the economy. The U.S. government has never defaulted on its debt and isn’t expected to do so this time.

Congress voted in July 2019 to suspend the debt limit until July 31, 2021. The Treasury is now using temporary “emergency measures” to conserve cash so the government can keep paying its obligations to bondholders, veterans and Social Security recipients.

Yellen warned last month that Treasury may not be able to sustain those emergency payments for long given how much Covid-19 stimulus Congress approved under the Trump and Biden administrations.

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