For several months, Republicans and Democrats in Washington, DC have been barreling towards each other on a collision course over a pair of looming fiscal deadlines. First, Congress must prevent a government shutdown by passing a temporary stopgap funding measure, called a continuing resolution (CR), before the new federal fiscal year begins on October 1. Second, lawmakers must agree to raise or suspend the statutory debt limit before mid-to-late October, or the Treasury Department will default on trillions of government obligations.

This week. House Democrats passed their opening bid, H.R.5305, on Monday and sent it to the Senate. Their continuing resolution would fund federal government operations through December 3, provide $28 billion in emergency disaster aid for drought, hurricane, flood, and fire-stricken areas, appropriate $6 billion for emergency Afghan refugee resettlement, and suspend the statutory debt limit for 15 months until December 16, 2022 (after the midterm elections).

State of play. Republicans are expected to block the measure in the Senate over objections to the debt limit language. Even though Democrats helped Republicans suspend the debt limit three times during the Trump Administration (even after Republicans unilaterally pushed through a $1.5 trillion tax cut in 2017), Republicans today are strongly opposed to the president’s Build Back Better agenda and are unwilling to provide any support for raising or suspending the debt limit. They want the debt limit language stripped out.

After this week, Democrats will have several unattractive choices:

Revise the debt limit language in the CR to expire along with the temporary appropriations in early December and hope at least ten Republicans in the Senate join with their Democratic colleagues to send the bill to the president. PROs: This short-term reprieve would give the Treasury Department time to reload extraordinary measures and Democrats the bandwidth to consider a more durable debt limit solution. CONs: Republicans probably still wouldn’t acquiesce and in the end, House and Senate Democrats will have consumed valuable calendar days that could be put toward a different, more viable, approach.

Strip the debt limit language from the CR and send the revised measure back to the Senate where it should pass, leaving the debt limit to travel independently as a standalone bill. At this point, Democrats could then send the Senate iteratively shorter debt limit suspensions (3-month, 2-month, 1-month, etc.), each one increasing the political pressure on Senate Republicans to cooperate and address the debt limit in a bipartisan fashion. PROs: Right now, Republicans believe they have a powerful argument against a longer-term debt suspension. They’ve successfully (albeit somewhat incorrectly) tied it to the Democrats’ $3.5 trillion social spending agenda. By shortening the suspension period to just a few weeks or months, Democrats undercut the Republicans’ key rhetorical point. CONs: Financial markets won’t like this approach at all, especially as theTreasury gets closer and closer to default.

Revise their FY 2022 budget resolution to include instructions to raise the debt limit via reconciliation. Sec. 304 of the Congressional Budget Act allows for the consideration of a “revised” budget resolution even after one is already in place. Theoretically, Democrats could revisit their FY 2022 budget resolution and include instructions to increase the statutory debt limit by a specific amount in a subsequent fast-track reconciliation bill. PROs: Democrats wouldn’t have to negotiate with Republicans to pass the bill; the measure could pass with a simple majority in both chambers. CONs: Too many to list comprehensively. In short: there is no precedent here and lots of procedural questions would need answers before any action. Precious calendar time would be spent meeting with the Senate Parliamentarian and Democratic caucus members to figure out a path forward – all while the clock ticks down toward default. Also, the vote on the debt limit reconciliation bill would be politically dangerous for moderate Democrats who plan to seek re-election in vulnerable districts next year. Of all the plausible options, this is the Democrats’ least favored.

Less plausible outcomes:

Technical default. If the debt limit isn’t raised or suspended in a timely fashion, the Treasury will reach a point where it won’t have enough cash on hand to pay all of its bills. It will still collect tax revenue, however, and at this point some experts believe the Treasury could prioritize certain obligations and pay them from existing receipts (e.g., pay interest owed on outstanding bonds). PROs: None. This is a “break glass in case of emergency” scenario only. CONs: Global panic and financial instability.

Invoke the 14th Amendment. Some legal scholars argue that if Congress cannot resolve the debt limit impasse, President Biden could authorize Treasury to continue borrowing above the debt limit by invoking section 4 of the 14th Amendment, the “Public Debt Clause.” This Civil War era amendment has never been tested however and would certainly be litigated in the courts. PROs: If successful, the debt limit would no longer be a political football – if the American economy (and specifically, the US dollar) survived long enough to see that day. CONs: The legal battle alone would amplify the financial panic caused by Congress’ failure to act on its own.

How will this end? A continuing resolution should pass both chambers before the deadline and keep the government operating, but the outlook for the debt limit is very murky. The Treasury Secretary, the business community, and former high-ranking officials in the Clinton, George W. Bush, and Trump administrations all have implored both parties to address the debt limit as soon as possible, and the Government Accountability Office (GAO) has published extensively on the costs imposed by prior episodes of debt limit brinkmanship. At this moment, however, both parties are engaged in a dangerous staring contest.

Who blinks first is anyone’s guess.

Distinction Between a Government Shutdown and a Debt Limit Impasse

Source: The Congressional Research Service

In a shutdown situation, Congress and the President have not enacted interim or full-year appropriations for an agency for part or all of a fiscal year. An expectation exists, however, that these appropriations will be enacted in the future. In this case, the agency temporarily does not have budget authority available for obligation for things like salaries, rent, or grants to states.

Under the Antideficiency Act, the agency may obligate some funds in certain “excepted” areas, but these obligations are highly restricted. As a consequence, the agency must shut down non-excepted activities, and the federal government may not make actual payment (i.e., outlays) for excepted or non-excepted activities until budget authority is provided, or unless another source of budget authority is utilized.

In a debt limit impasse, by contrast, the government no longer has an ability to borrow to finance its obligations. In such a situation, an agency may continue to obligate any available budget authority that has previously been enacted. However, the Department of the Treasury may not be able to liquidate all obligations that are due to be paid, because of a shortage of cash. As a result, the federal government would need to rely solely on incoming revenues to finance obligations. If this occurs during a period when the federal government is running a deficit, the dollar amount of newly incurred federal obligations would exceed the dollar amount of newly incoming revenues. This may result in delays in federal payments and disruptions in government operations.