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Debt ceiling | If no compromise is reached, what happens to DC region?

Experts say the DC region could be disproportionately impacted compared to other American metropolitan areas due to its large number of federal workers.

WASHINGTON — If White House officials and Congressional Republicans fail to reach a compromise on the debt ceiling by June 1, experts say the D.C. region could be disproportionately impacted compared to other American metropolitan areas.

Both parties continued to negotiate over how to raise the nation’s debt ceiling Tuesday.

The debt ceiling represents the maximum amount of money the United States government is allowed to borrow to meet its existing financial obligations. The U.S. Department of Treasury says that includes payments for Social Security and Medicare benefitsmilitary salaries, interest on the national debt and tax refunds.

Treasury Secretary Janet Yellen wrote House Speaker Kevin McCarthy on Monday, the United States could reach its debt limit as early as June 1.

The treasury department has characterized the consequences of not raising or suspending the debt ceiling as potentially “catastrophic”. 

"If Congress fails to increase the debt limit, it would cause severe hardship to American families, harm our global leadership position, and raise questions about our ability to defend our national security interests,” Yellen said.

Michael Faulkender, the Dean's Professor of Finance at the University of Maryland’s Smith School, also served as former Assistant Secretary for Economic Policy at Department of Treasury, during President Donald Trump’s administration.

He points out the treasury department will still receive plenty of money that comes in through sources like Americans’ income tax withholdings. However, he adds that’s where things will get tricky if no compromise is reached, as that money will have to go toward paying the country’s existing obligations.

“My understanding, having been at treasury, you would have to pay the interest [on the debt] first and then there’s not going to be enough money left over to pay all the things that are authorized,” Faulkender said.

He said Yellen, with the assistance of her advisors, will have to determine how much money goes to things like federal workers and contractors. It’s likely cuts to certain parts of government spending will hurt the D.C. region more than other locales.

“It would likely have a disproportionate effect on the D.C. area because so much of the income derived from people in this area comes from the federal government,” Faulkender said.

In 2022, the District of Columbia, Virginia, and Maryland ranked No. 1, No. 3 and No. 4 respectively for the number of federal workers they had compared to the rest of the United States, according to the United States Office of Personnel Management.

If federal defense spending is reduced, the D.C. region would also likely feel a disproportionate effect as there are numerous military installations spread out across the area.

“That’s going to be true of any geography where the primary employer is the federal government,” Faulkender said. “The military bases, be it a large federal agency that has a significant presence there, the higher the portion of local dollars that come from the federal government, the more potentially impacted they would be.”

In 2021, Virginia also had the second-highest number of active-duty members in the country, according to the Department of Defense.

Daniel Horowitz, deputy legislative director of the American Federation of Government Employees, said if the debt ceiling is not raised, it will likely result in an economic recession.

He said that could cause problems for the region’s federal workers, too.

“Our workers are middle class people who work throughout the pandemic and face the same struggles as working-class people everywhere,” he said. “High housing costs, high interest rates, inflation, and now put on top of that, the possibility their pay may be cut or their agency budgets may be slashed and it’s a very serious situation.”

Furthermore, Horowitz said he is concerned what the framework of a deal between the White House and Congressional Republicans could spell for federal workers.

“A deal could mean cuts to defense, veterans, health and safety programs throughout the government, the Park Service, scientific research,” he said. “A deal could be a huge problem.”

Horowitz accused Republicans of holding the government and nation’s economy “hostage."

“And, unless they get their way on key terms, we could be looking at serious cuts to government agencies and programs, and to government benefits and salaries.”

However, Faulkender says the ball, right now, is in the democratically controlled court of the United States Senate.

“I do remind people on a regular basis the House of Representatives has passed a debt ceiling increase, it is the Senate that has not passed a debt ceiling increase,” he said. “So, the burden right now is not on the House. It’s on the Senate to likewise come up with a debt ceiling increase, so that the two houses can go to conference and put something on the president’s desk.”

While Faulkender said he’s hopeful a crisis is averted, he said he thinks lawmakers’ current negotiations could provide at least one silver lining.

“I would rather to see that the White House and the Speaker come to an agreement that both raises the debt ceiling and addresses the long-term, unsustainable nature of our current fiscal situation,” he said. “I don’t think we should just continue on auto-pilot with a large portion of our spending that’s not subject to appropriation being reviewed.”

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