Treasury secretary warns the government could become unable to pay its bills after early June
Three Ways the Democrats could overhaul the Debt Ceiling
By Andrew Duehren from the Wall Street Journal. Ken Thomas contributed to this article.
Updated Jan. 13, 2023
WASHINGTON—Treasury Secretary Janet Yellen called on Congress to raise the debt ceiling as soon as possible, warning that the government could become unable to pay its bills after early June.
In a formal letter sent to party leaders in Congress, Ms. Yellen said the government would hit the roughly $31.4 trillion borrowing limit on Jan. 19, when the Treasury Department will begin implementing so-called extraordinary measures to manage the government’s cash flow.
“While Treasury is not currently able to provide an estimate of how long extraordinary measures will enable us to continue to pay the government’s obligations, it is unlikely that cash and extraordinary measures will be exhausted before early June,” Ms. Yellen wrote to Congressional leaders.
The letter from Ms. Yellen kicks off what is expected to be fraught and politically difficult negotiations in Congress. House Republicans, who recently took the majority in the House, are insisting that an agreement on raising the debt limit include spending cuts, a demand that Democrats have already rejected out of hand. Democrats control the White House and Senate.
Some lawmakers in both parties, as well as market-watchers and administration officials, are already concerned that the impasse could bring the U.S. to the brink of defaulting on its debt. A standoff over government spending and the debt limit in 2011 caused a downgrade of the U.S. credit rating and roiled financial markets.
Raising the debt limit doesn’t incur new government spending, but instead authorizes the Treasury to borrow to pay for expenses Congress separately approves. A failure to pay U.S. government bondholders, Social Security recipients and others on time could have far-reaching economic consequences, Ms. Yellen warned.
“Failure to meet the government’s obligations would cause irreparable harm to the U.S. economy, the livelihoods of all Americans and global financial stability,” she said.
The federal deficit—the annual difference between government spending and revenue—exploded during the Covid-19 pandemic, when Republicans and Democrats injected more than $5 trillion of aid into the economy. As those pandemic aid programs wound down, the federal deficit dropped precipitously last fiscal year.
So far this fiscal year, which began in October, the federal deficit has increased by 12% compared with last year. Higher borrowing costs on the government’s debt, caused by the Federal Reserve’s raising interest rates to fight inflation, are the primary driver of higher government spending this fiscal year.
The exact duration of the Treasury’s extraordinary measures—which include halting investments in certain government funds—is uncertain because it hinges on broader economic conditions, like interest rates and tax receipts.
Democrats and Republicans have ultimately come together on an agreement on raising the debt limit repeatedly in recent years, including in 2021 when Senate Republicans dropped their demands that Democrats slash their other policy plans. But House Speaker Kevin McCarthy (R., Calif.) promised conservatives he would fight over the issue as he campaigned for the speakership, making a series of procedural concessions that have emboldened conservative Republicans.
“Spending is out of control,” Mr. McCarthy said on Thursday. “We cannot continue around the same process. I had a very good conversation with the president when he called me and I told him I’d like to sit down with him early and work through these challenges.”
Republicans haven’t provided details of their proposal, but some have floated reductions in defense and nondefense spending, as well as changes to Medicare and Social Security to cut costs, with the aim of balancing the federal budget.
White House officials have criticized Republican plans to cut spending, saying the debt ceiling should be raised without conditions.
“The president and the country will not stand for anyone saying, ‘unless I can cut Medicare, Social Security, Medicaid, or other programs seniors and middle-class and working families count on, I will cost tens of millions of Americans their jobs and retirement savings’,” White House spokesman Andrew Bates said Friday.
The standoff over the debt limit comes at a fragile time for the economy. The Federal Reserve’s campaign to snub out inflation has left some worried that higher interest rates could tip the U.S. into a recession. Economic growth around the world is slowing.
Uncertainty over the reliability of Treasurys—a safe-haven asset around the world that underpins much of the financial system—could further cloud the economic outlook.
“The thing that makes me most concerned is the timing,” said Mark Zandi, the chief economist at Moody’s Analytics. “This is all going to come down to later this year…when most economists think recession risks are going to be their greatest.”