US lawmakers lock horns over debt limit as default threat looms

US representatives were set to vote as early as Wednesday on Republican proposals combining steep spending cuts with a hike in the country's borrowing limit to head off a potentially catastrophic credit default.

The government is expecting to hit the debt ceiling within weeks, raising the possibility of the world's largest economy defaulting on its repayments and igniting a firestorm that could engulf international markets.

The Limit, Save, Grow Act -- opposed by the Democrats -- has no chance of becoming law but Republicans are trying to muscle it through the House of Representatives as an opening salvo in negotiations with President Joe Biden.

The high-stakes standoff is the first major test for America's divided government after Republicans and Democrats assumed joint control of Congress this year.

Crucially, it is being touted as a measure of Republican House Speaker Kevin McCarthy's leadership after he secured the gavel in January by pledging to his party's hard-right that he would rein in federal spending.

"I know President Biden might be focused on his own political future today, but he should be focused on the future of America," McCarthy said Tuesday after the Democratic leader announced he was running for re-election.

"Biden should have announced he will finally come to the table and negotiate a responsible debt limit increase to avoid the first default in our history."

The United States is almost $32 trillion in debt -- a figure that has been accumulated under both parties over decades.

Congress has voted to allow greater debt limits more than 150 times in the past century or so and in most cases the process has been routine.

The 320-page Republican bill would raise the ceiling through March 2024 -- or until the debt grows to $32.9 trillion -- but it demands drastic belt-tightening in federal programs that the Congressional Budget Office estimates would save $4.8 trillion over a decade.

The stakes are extraordinarily high for McCarthy, who has been able to meet just once with Biden as the president has steadfastly refused to entertain any debt limit increase involving concessions and has vowed to veto the bill.

If the vote fails, the House could be forced to move a no-strings-attached hike -- exactly what Biden wants but a potential disaster for the speaker, who would risk losing support among his party's right flank.

The outcome is on a knife edge, with McCarthy only able to lose four Republicans and as many as 10 still said to be unconvinced.

He has signaled his intention to press ahead on Wednesday but acknowledges that the vote may need to be delayed if his bid to win over the holdouts does not bear fruit in time.

McCarthy's charm offensive hit a roadblock Monday though as ratings agency Moody's Analytics estimated that his plan could stunt 2024 growth by 0.6 percentage points and kill 780,000 jobs.

Konrad Petraitis, an Americas analyst for strategic risk consultancy Sibylline, predicted however that McCarthy would prevail, putting Biden under pressure to come to the negotiating table.

"Biden has focused on a message stressing that the Democrats are good stewards of the economy and that his government has been able to right the ship against severe external pressures," he told AFP.

"His message is undercut, however, if the debt ceiling negotiations lead to a default."

US Treasury debt is considered the world's benchmark safe asset and its interest rates are the basis for the pricing of financial products and transactions across the planet.

Economists argue that failure to honor repayment obligations could panic investors, supercharge borrowing costs and torch millions of jobs.

The Treasury has been using "extraordinary measures" -- essentially moving money around and drawing on certain accounting tools -- for months to keep paying creditors who own government bonds.

It is likely to be able to continue doing this until late July, although there is a small chance that the government's wiggle room could run out by mid-June.

Experts expect the markets to start getting jittery by late May if no deal emerges between Congress and the White House.