A recession is more likely under the Republican debt-ceiling plan, Moody's chief economist warns

"We need to end this drama as quickly as possible. If we don't, we'll go into a recession and our fiscal problems will be made even worse."

• A Republican proposal to lift the debt ceiling would make a recession more likely, said Moody's chief economist Mark Zandi.
• Under the GOP bill, economic growth would slow to 1.61% by the end of 2024, he told lawmakers.
• "We need to end this drama as quickly as possible. If we don't, we'll go into a recession and our fiscal problems will be made even worse."

A Republican proposal to lift the debt ceiling would slow the economy and increase the likelihood of a recession, Moody's Analytics chief economist Mark Zandi said.

House Speaker Kevin McCarthy has offered a bill to lift the debt ceiling in exchange for cuts to government spending of about 8% next year, and a cap on its growth of 1% each year after that.

Speaking to the Senate Budget Committee on Thursday, Zandi warned that the proposed reductions could reduce employment by the end of 2024 by about 800,000 jobs and lift the jobless rate closer to 5% from 3.5% now.

Also by 2024, economic growth would slow to 1.61% under the Republican bill, compared to current forecasts of 2.23%, he said, adding that the GOP deal would "meaningfully increase" the likelihood of a recession.

He also estimated that the Treasury is most likely to run out of cash by June 8 — though anytime between June 1 and August 8 is possible.

"We need to end this drama as quickly as possible," Zandi said. "If we don't, we'll go into a recession and our fiscal problems will be made even worse."

Treasury Secretary Janet Yellen has said the government could run out of money and trigger an economic crisis as soon as June 1.

The GOP bill is unlikely to pass in the Democrat-controlled Senate, extending a partisan deadlock that began when the $31.4 trillion debt was reached in January.

The White House has said it will not accept spending cuts as a condition for raising the debt ceiling and is pushing for a "clean" bill instead.

But President Joe Biden is scheduled to meet with McCarthy and other top lawmakers at the White House on Tuesday.

Zandi has previously warned that allowing a US default to happen would create a financial crisis similar to that of 2008. He has also thrown doubt on work-arounds in case the debt limit isn't lifted, such as minting a $1 trillion dollar coin or invoking the 14th Amendment.  

Failure to lift the debt ceiling would devastate stocks and bonds, even if the US government prioritized payments to stave off an immediate default, former New York Fed President Bill Dudley wrote in a Bloomberg column this week.

"I have one message for those observing or involved in the standoff over raising the US federal debt limit: Be afraid, be very afraid," he said. "At this point in the financial and economic cycle, the consequences of failing to reach a deal would be particularly dire."