• The White House sent a memo to state and local governments warning of potential cuts to federal programs if Congress fails to lift debt ceiling.
• Measures like Medicaid and free school lunches could be affected, it said.
• The memo warned of a possible recession as Republicans show no sign of budging on raising debt ceiling.

The White House is warning state and local governments of substantial cuts to federally funded measures such as Medicaid, school lunch, and disaster relief programs if Congress fails to raise the debt ceiling.

In a new memo sent to state and local governments on Friday and obtained by Insider, the Biden administration laid out how a potential US default would ripple through at the state and local level. Programs that could face major reductions in federal aid include Medicaid and the Children’s Health Insurance Program, both measures that provide free health insurance to tens of millions of low-income Americans.

It also warned of cuts to federally funded school lunch programs that provide free or reduced-cost meals to nearly 30 million children and halt money for disaster relief. That could hinder aid efforts in the wake of wildfires that scorched parts of the western US and Hurricane Ida slamming into the South.

“Hitting the debt ceiling could cause a

recession
,” the memo said. “Economic growth would falter, unemployment would rise, and the labor market could lose millions of jobs.”

Put simply, the debt ceiling caps how much the government can borrow. While the government raises cash through taxes, it borrows to pay off past spending. Yet in recent years, lifting the limit has become just as much a political battle as it is a housekeeping item.

President Joe Biden is urging Republicans to get on board with a debt ceiling increase, as they did three times under the Trump administration. But Senate Minority Leader Mitch McConnell has said Republicans won’t help Democrats raise the debt limit, arguing they’re responsible for it to cover spending from their $3.5 trillion social spending plan. He told Punchbowl News this week that he wasn’t “bluffing.”

That hasn’t impeded the Biden administration and Democrats from trying to ramp up pressure on Republicans, warning of economic calamity if the US is unable to pay off its debt. “The president wants to maintain the full faith and credit of the United States,” White House Press Secretary Jen Psaki said on Thursday. “Our view continues to be: this should be done in a bipartisan way and there should be a bipartisan path forward.”

A debt-ceiling recession would come as the US recovery is already faltering. The unemployment rate hasn’t yet reached its pre-pandemic lows, and more than 8 million Americans remain jobless. Supply-chain bottlenecks and shortages have lifted inflation to decade highs. Also, as Delta cases soar higher, banks have lowered their forecasts for economic growth. Peak rebound has come and gone, and crashing into the debt limit would reverse more than a year of recovery progress.

The “obvious solution” would be to erase the limit indefinitely, David Kelly, chief global strategist at JPMorgan Funds, said in a Monday note. There’s little evidence the ceiling did much to slow the growth of the government’s debt pile, and battles over raising the limit shift focus away from discussions on taxes and spending programs, he added. 

Each Congress has been “just a little more reckless and irresponsible than the last” with the debt limit, and the current legislative body is dangerously close to letting the country default, Kelly said.