The U.S. has hit its debt ceiling. How could Canada be impacted if a deal isn’t reached? – National

A political battle is brewing in the United States over a self-imposed cap on federal borrowing — and experts warn Canada’s economy may not be immune if the stalemate isn’t resolved.

U.S. Treasury Secretary Janet Yellen alerted lawmakers last week that the country would hit the debt ceiling, currently set at US$31.4 trillion, on Thursday. Now that the day is here, Congress has until early June to reach a deal on either raising or suspending the limit to avoid defaulting on the national debt, Yellen said.

“Failure to meet the government’s obligations would cause irreparable harm to the U.S. economy, the livelihoods of all Americans, and global financial stability,” she wrote in a letter to congressional leaders.

Republicans, who now control the House of Representatives, have said they plan to push for government spending cuts before agreeing to further raising the debt ceiling. The White House has said it will not negotiate such a compromise, setting up a potentially bruising standoff with Democrats that could drag on for months.

While previous debt ceiling fights have been resolved, the concern north of the border is that this time is different.

“Whatever happens in the U.S. has huge consequences here,” said Kristen Hopewell, a public policy professor at the University of British Columbia’s School of Public Policy and Global Affairs.

“We can certainly hope that the two sides will reach a resolution and avert catastrophe. But there’s no guarantee that that will happen, especially with how they are playing this game of chicken.”

First introduced in 1917 to help pay for the First World War, the debt ceiling limits how much money the U.S. government can borrow in order to meet its spending requirements.

If the ceiling is hit, it means the government can no longer pay its bills, which would send it into default. Federal employees and contractors may no longer be paid, and an economic crisis could explode.

Moody’s Analytics warned in 2021 that a default would be “cataclysmic” and “devastating,” forecasting a GDP decline of…