Ten Things We Hate About a Potential Default

Debt limit brinkmanship has become a recurring pastime for Congress. Until lawmakers reform the process, however, the United States will keep accruing debt and inevitably hit the debt limit again and again, carrying with it the risk of delaying critical payments to American households and businesses, or potentially even defaulting on the national debt. By reforming the debt limit and avoiding the repeated flirtation with disaster, we can steer clear of the 10 devastating consequences outlined below:

1. Inflicting Widespread Short-Term Economic Pain

Any delay in government payments or a default could lead to an economic slowdown at best, or a prolonged recession at worst. The Federal Reserve projected in 2013 that a one-month delay in payment obligations would have caused real growth in gross domestic product (GDP) to contract by more than a percentage point. In 2023, this would equate to hundreds of billions of dollars in lost economic activity.

2. Burdening American Households and Businesses with Higher Interest Rates

America’s sovereign credit rating could witness further downgrades, resulting in  high interest rates throughout the economy, from mortgages to small business loans to interest payments on credit card balances and car payments—meaning month-to-month expenses could skyrocket for hardworking Americans. For example, at the current average and for a 30-year fixed rate mortgage ($423,500 and 7.38%, respectively), a 0.5 percentage point increase in mortgage rates would lead to $1,752 in increased annual payments for homeowners.

3. Increasing Costs to Taxpayers

When investors start to lose confidence, interest rates rise on U.S. Treasury securities—increasing the government’s borrowing costs and leaving taxpayers to foot the bill. In 2023, a permanent 0.5 percentage point rise in interest rates could have increased net interest costs by nearly $1.5 trillion over 10 years ($6,882 per taxpayer), worsening our unsustainable debt trajectory.

4. Delaying Critical Benefits That Millions Rely On

Delayed payments could affect programs that touch nearly every American, from Social Security to military salaries and veterans’ benefits. For example, the 67 million Americans who receive, on average, $1,700 per month in Social Security benefits may have seen their checks delayed. A debt limit disaster would jeopardize the pay and benefits of more than 1.4 million active duty military servicemembers. Supplemental Nutrition Assistance Program (SNAP) benefits, which help over 40 million Americans afford groceries each month, could be interrupted as well. The number of missed checks would grow rapidly as the impasse dragged on, causing widespread confusion and income shocks for households and business owners who rely on these programs.

5. Hurting Investors and Savers

Major stock indices could nosedive, hurting Americans saving for retirement, for their children’s education, or for any number of personal savings goals or major expenses. Ahead of the 2011 debt limit episode—one without a default or missed payments—the S&P 500 lost 17% of its value and took more than six months to return to its pre-impasse peak. A stock market downturn from an actual default would likely be much deeper and longer.

6. Delaying Tax Refunds

Taxpayers and small businesses owed money by the IRS could experience refund delays, materially impacting their finances, and indeed costing all taxpayers, since the IRS would have to pay extra interest penalties for delayed refunds. (For example, the IRS paid out $3.3 billion in interest in 2021 alone due to COVID-driven backlogs.)

7. Interrupting Vital Government Services

A substantial portion of federal spending is government purchases and payments for services, from reimbursements to Medicare providers and insurers for services and prescription drugs for seniors to grants supporting elementary and secondary schools. Important infrastructure projects such as road repairs, water quality improvements, and rural broadband could be delayed or completely halted. The government would be defaulting on legally obligated payments for goods and services that have already been purchased, endangering business owners’ ability to pay their employees or make rent payments—potentially forcing those businesses into bankruptcy and their workers into unemployment.

8. Weakening U.S. Competitiveness Against Global Adversaries

As the U.S. works to strengthen its competitive edge with China, a default could severely compromise economic and national security. The U.S. becoming the first country to ever voluntarily stop meeting its obligations could do terrible damage to our global leadership, undercutting our position as the world’s strongest economy and holder of the world’s reserve currency. Developing nations with substantial holdings of U.S. dollars would also suffer, as the value of the currency likely would decline.

9. Depressing Business Investment, Job Creation, and Long-Term Growth

The Federal Reserve estimated that the effects of an impasse resulting in a month’s worth of missed payments would cascade through at least the following five years. What does that mean? That’s five years of depressed economic growth, elevated unemployment, increased borrowing costs for businesses, and greater challenges for small business owners in securing capital for investment in workers and innovation.

10. Delaying Pay and Benefits for Government Workers

The federal government employs over 2 million people, and many would have their regular pay and benefits interrupted or affected. Government employees would see their paychecks delayed for an unknown period, creating financial hardship for some and hurting local economies.

The U.S. defaulting on its obligations would not only pose great risk to American taxpayers and the economy, but also to the nation’s global reputation for years to come. Lawmakers should reform the debt limit process so that none of these devastating consequences come to pass, while also addressing the root causes of our persistent and worsening budget imbalances.