PM stresses importance of resolving US debt ceiling

·2-min read

Australia's prime minister remains concerned about the tense US debt ceiling negotiations that could have dire consequences for the global economy if a deal is not struck in time.

President Joe Biden and House Speaker Kevin McCarthy have been locked in negotiations to lift the limit on public borrowing before the rough deadline of June 1.

Talks between the Democrat president and Republican speaker struck a more productive tone on Monday after negotiations started fraying late last week.

President Biden reiterated that a "default is off the table" and both leaders said talks would continue over the coming days.

The US president scrapped his planned visit to Australia last week due to ongoing negotiations with Congress over the debt ceiling.

Prime Minister Anthony Albanese said it was understandable the president had to cancel.

"We, of course, understand the domestic and international interest in avoiding a US default," he told the Labor caucus on Tuesday.

AMP Capital chief economist Shane Oliver said a failure to reach a deal in time would likely trigger a deep recession in the US but both the Republicans and the Democrats were well aware of the risks.

He said a failure to raise the $US31.4 trillion ($47.2 trillion) debt ceiling, which is the hard limit the US government can borrow to pay its bills, would effectively slash US spending by around seven per cent of GDP.

This would likely lead to a recession in the US and trigger financial market turmoil that would flow through to Australia.

Dr Oliver put the chance of defaulting on some payments at around 10-15 per cent if a deal was not reached in time.

He also said the US government may not necessarily default but instead furlough public sector staff or delay social security payments, but this would also prompt financial instability.

Dr Oliver told AAP the most likely scenario, based on debt ceiling crises in the past, would be some level of compromise broached at the eleventh hour.

While both parties agree the fiscal position is too deep in the red, the Republicans are calling for sharp budget cuts while the Democrats want to reduce deficits in part by lifting taxes.

The economist said both political leaders were likely holding out to appease their base.

"Neither wants to be seen as giving in too easily, they both need to look like they are standing tough," he said.

Dr Oliver said financial market ructions in the lead-up to the cut-off date nudged leaders towards a deal when the debt ceiling was last debated under the Obama administration.

He said another market "hissy fit" could help get the deal over the line.