Treasury Secretary Timothy Geithner warned on Wednesday that the United States will not be able to stave off default by prioritising debt payments if Congress does not raise the debt limit by August 2. With budget talks at a standstill, the International Monetary Fund also said failure to reach a deal soon could deliver a "severe shock" to a still-fragile recovery and global markets.
President Barack Obama and congressional Republicans are deadlocked over whether tax increases should be part of a spending-cut deal that would give lawmakers political cover to extend the government's borrowing authority. Financial markets have so far shown little concern, but that could change if Washington does not reach a deal in the coming weeks to increase the country's $14.3 trillion debt ceiling.
Failure to act by August 2 would impose an immediate 44 percent spending cut on Treasury outlays, according to the Bipartisan Policy Center, a centrist think tank. Many Republicans suggest that Treasury could stave off default after that point by prioritising debt payments over retirement benefits and other obligations, but Geithner said that approach would still cause investors to shun US debt.
"Ultimately, the notion of 'prioritising' payments is futile because the debt limit must be increased regardless of which spending path is adopted," Geithner wrote in a letter to congressional Republicans. "There is no credible budget plan under which a debt limit increase can be avoided." Negotiators have tentatively identified between $1.5 trillion and $2 trillion in spending cuts.
Senate Republican Leader Mitch McConnell says the impasse will remain until Democrats drop the idea of closing a variety of tax breaks that benefit businesses and wealthy individuals. "The Democrats' spending spree has brought us to the brink of an economic calamity. And now they're telling taxpayers they won't do anything to prevent it unless the taxpayers hand over more money in the form of tax hikes," McConnell said on the Senate floor.
McConnell and other Republicans want to change the Constitution to require the government to balance its books each year - a step that could limit Washington's ability to respond to economic downturns or emergencies. The measure has little chance of clearing the high hurdles needed to become part of the Constitution, but it could make some Democrats uncomfortable as the 2012 election approach.