The debt ceiling could spark the first big battle between the White House and new Congress early next year, and some analysts already see it as a potential high-stakes risk for markets. Congress last raised the debt ceiling by $2.5 trillion December, 2021, providing enough borrowing capacity to get past the midterm elections. But the next time the $31.4 trillion borrowing limit needs to be raised, it could be by a Republican-controlled or split Congress that is at odds with the White House over how much the government spends and how it is spending it. "This is the first time since 2011 that it's an honest risk. It's a legitimate market issue," said Ed Mills, Raymond James Washington policy analyst. "Since 2011, the market really hasn't reacted too much to the debt ceiling fights. They learned that D.C. will ultimately fix it. It's a little bit of a game of chicken between D.C. and the markets. D.C. doesn't feel the pressure until the markets react, and the markets don't react until D.C. lets it go close to the deadline." The Republican party is expected to gain enough seats in Tuesday's election to reclaim leadership of the House of Representatives and possibly the Senate. That would pit the White House against congressional Republicans, who see raising the debt ceiling as an opportunity to cut and redirect spending. In 2011, when then-President Barack Obama and Congressional Republicans sparred over spending, the U.S. reached a debt ceiling crisis that that led to the downgrade of the U.S. credit rating by Standard and Poor's. If Congress does not raise the debt ceiling, the U.S. would be in default on its debt and that could create tumult in global financial markets. Mills said Republican lawmakers have already laid out their conditions. "What they are saying is they will raise it, but the will only raise it if there are budget cuts that come with it and entitlement reforms," Mills said. Republican Minority Leader Rep. Kevin McCarthy (R-Calif.) has said he would be open to using the debt ceiling to leverage spending cuts. But Rep. Patrick McHenry (R-N.C.) was quoted by Politico as saying that he opposes McCarthy's plan to use the debt ceiling as a bargaining chip. McHenry would chair the House Financial Services Committee if Republicans take control of the House as expected. "You'd have an immediate car accident right at the beginning of the Republicans taking over, at a time when there's just a lot of financial market volatility," said Dan Clifton, head of policy strategy at Strategas. He expects any debt ceiling fight would be much more contentious than those in recent years. "It would look more like 2011 with this Republican House wanting a lot of concessions." Clifton said the debt ceiling may need to be increased by as soon as the first quarter, and it's possible the current Democrat-controlled Congress would pass a bill to raise it in the lame duck session before the new Congress takes over in January. "The interest cost is starting to explode," he said, noting that is speeding up the need to act. A matter of timing Analysts say it is not clear exactly when the U.S. borrowing limit would need to be raised. The Bipartisan Policy Center projects that the federal government will reach its debt limit "sometime during or after the first quarter of 2023." The government could use extraordinary measures to keep the government going and not reach the "X Date" until the third quarter, the BPC said. Raising the debt limit does not mean the government is increasing spending. It funds the spending that has already been approved. The U.S. debt limit has been increased more than 70 times. A Treasury official last week declined during a press briefing to say when the Treasury would need to take action to avoid breaching the debt limit. "It's important for Congress to raise or suspend the debt limit in a timely fashion," Joshua Frost, the department's assistant secretary for financial markets, was quoted as saying. President Joe Biden, in a tweet, last weekend talked about the pending debt ceiling battle. "Republican leaders are saying that if I don't help them cut Social Security and Medicare then guess what? They will wreak havoc on our economy and refuse to raise the debt ceiling. I'm not joking. As my grandkids would say, "Google it." Debate over entitlements McCarthy, who could be majority leader in a GOP-controlled House, has denied that he said he would tie raising the debt limit to Medicare and Social Security, though other Republicans have targeted those programs for spending cuts. On CNBC last month, McCarthy said he never brought up the entitlement programs in a recent interview, but he also doesn't want to give the Biden Administration a "blank check" in exchange for raising the debt ceiling. "I never mentioned Social Security or Medicare. Actually, in the 'Commitment to America,' we say to strengthen Social Security and Medicare," McCarthy said on CNBC. Clifton said there are signs that Democrats may now be willing to extend the limit on U.S. borrowing before the next Congress is seated. "If this was a week ago, I would have said 'no.' There was some real resistance even days ago," he said. "You're seeing that fever break again. I think a lot of Democrats realize it's better to raise the debt ceiling before the Republicans take over and there are spending cuts attached to it." He expects Democrats may have a spending package attached to any legislation that would raise the limit. Mills said it's not clear there are the votes to raise the limit before the current Congress adjourns. "It's not close enough to being a crisis. If they worked to get it done in the lame duck, it would be a massive market positive," he said. He said that even before the debt ceiling, Congress needs to pass a continuing resolution in December to temporarily fund the government. Mills said there could be a continuing resolution that would run until February, when the new Congress is in place. "They could fight in February if you don't get agreement," Mills said. "In 2011, they first had the fight over the government funding and they shut the government down."
