Here’s what chaos in the US house means for the economy

House Speaker Kevin McCarthy, R-Calif., emerged Saturday after fierce Republican negotiations with gavel in hand, but the concessions he made in the process have heightened concerns about a potential economic crisis later this year.

The empowerment of far-right lawmakers in recent days has increased the risk of contentious, high-stakes negotiations over how the federal government should pay off past debts and allocate future spending, economists and budget experts told ABC News.

Failure to reach an agreement ahead of rapidly approaching deadlines would roil financial markets, raise interest rates at a moment when elevated borrowing costs are already weighing on economic activity, and all but ensure a recession, they added.

Within months, Congress must pass two measures to avert economic disruption: an increase in the debt ceiling, allowing the US government to borrow money for past expenses to ensure the nation continues to pay creditors what it owes; and a budget that will fund the government for the next fiscal year.

The conservative Republican faction that influenced the choice of speaker has indicated that they would not raise the debt ceiling unless Democrats agree to significant spending cuts; However, the Biden administration has said it will not participate in policy negotiations that are contingent on annual borrowing increases.

Meanwhile, sharp spending cuts proposed by some Republicans risk a deadlock on next year’s budget, which could lead to a government shutdown halting some federal payments, economists and budget experts said.

“The events of the past week are quite disturbing,” said Shai Akabas, director of economic policy at the Bipartisan Policy Center. “It’s going to make passing legislation more difficult than usual, and it’s never easy to get started under a divided government.”

“It is a serious risk to the US economy and the financial well-being of Americans,” he added.

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Here’s what you need to know about what the recent turmoil in the House of Representatives means for the US economy:

debt limit

Part of the dispute among Republicans over McCarthy revolved around the party’s approach to the nation’s debt limit, the amount of money the US is legally allowed to borrow to meet its debt.

As annual federal spending exceeds tax revenue, the US has accumulated tens of trillions of dollars in debt, which obliges the country to make ongoing payments to keep from defaulting on outstanding loans.

In return, Congress annually passes a measure that allows the US Treasury Department to increase the amount of the loan. In a few years, raising the debt limit has become a political lightning rod, sparking debate about the nation’s fiscal responsibility. In 2011, for example, Republicans in Congress pressured then-President Barack Obama to agree to some spending cuts to gain their support for raising the debt ceiling.

In an effort to garner support from far-right members of the House of Representatives, McCarthy agreed to oppose raising the debt ceiling unless Democrats agree to major spending cuts, the New York Times reported.

A dispute over the debt limit will reach a tipping point within months, according to Akabas, who said the organization expects the government to default on its debt obligations sometime midway this calendar year.

A failure to raise the debt ceiling and a consequent default on US debt — something that has never happened before — would do immense damage to the US and global economy, as the trustworthiness of US Treasury bonds is a cornerstone for domestic and international investment, economists and represents the budget, analysts said.

PHOTO: Rep. Mike Rogers is restrained by Rep. Richard Hudson after getting into an argument with Rep. Matt Gaetz as House Republican leader Kevin McCarthy speaks in the chamber of the House of Representatives in Washington on Jan. 6, 2023 DC, go away

Rep. Mike Rogers is restrained by Rep. Richard Hudson after getting into an argument with Rep. Matt Gaetz as House Republican Leader Kevin McCarthy in the House of Representatives chamber on January 6, 2023 in Washington, DC goes away

Anna Moneymaker/Getty Images

If confidence in US borrowers falls, interest rates on loans would rise for some companies and slow economic activity as the US already faces heightened risk of a recession, they said. In addition, the stock market would tumble and threaten the retirement savings of millions of Americans, they added.

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“A debt default would be a disaster for financial markets and a disaster for America’s standing in the world,” Daniel Bergstresser, finance professor at Brandeis International Business School, told ABC News.

“America’s political and economic system is large enough that many consider US Treasury bonds to be as good as they can be,” he added, noting that the consequences would likely include a fall in the value of the US dollar.

A default in US debt could wipe 3 million jobs out of the economy, raise the cost of a 30-year mortgage by an average of $130,000, and raise the 401(k) savings for a typical worker nearing retirement by $20,000 US dollar shrinking, according to report by centre-left think tank Third Way.

“If we breach the debt ceiling for an extended period of time, we’re almost certainly going to push the economy into recession,” Zach Moller, director of economic programs at Third Way, told ABC News.

Akabas of the Bipartisan Policy Center described the economic fallout from the US debt default as a “flame of risk.”

“These are uncharted waters,” he added. “It would likely entail costs for the US taxpayer, the American economy and the world economy.”

government shutdown

In addition to covering previous expenses, the federal government must agree on the distribution of funds for the next fiscal year, which begins in October.

If Congress doesn’t pass a budget by then, the US government will shut down as agencies struggle to maintain government programs and pay federal employees.

A group of far-right Republicans have called for significant government spending cuts that would put the nation on track to balance its budget in 10 years.

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As part of the concessions to the conservative faction, McCarthy has vowed to push for sharp cuts that include reductions in entitlement programs like Medicare and Social Security – bulwarks of financial health for many older Americans, the New York Times reported.

Spending cuts on the scale demanded by far-right Republicans would dramatically limit federal programs, although the details remain unclear because lawmakers have yet to come up with a detailed proposal, economists and budget analysts said.

“Balancing the budget in 10 years is too daunting a task to be a serious policy proposition,” Maya MacGuineas, president of the Washington Federal Budget Committee, which advocates fiscal responsibility through spending cuts and tax increases.

“The policies they are demanding must be achievable,” she told ABC News.

If Congress doesn’t come up with a budget in the meantime and the government shuts down, the turmoil could have far-reaching effects, including the closure of some national parks and cuts in government services like passport processing.

“Shutdowns, while disruptive, are not catastrophic,” she said.

A government shutdown would also cause economic pain as the nation sees a reduction in some programs Americans rely on and a pause in work for some federal employees, Akabas said.

“It’s certainly not good for the economy,” he said.

MacGuineas said concessions to far-right Republicans in recent days had made them uncertain about how the debt limit and budget negotiations would be resolved.

“It hurts my head,” she said. “I don’t know – and that makes me very uncomfortable.”

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