The U.S. Treasury Department said on Friday that the U.S. could default on its debt as early as June, in what would be one of the first major battles on Capitol Hill under Republican control of the House of Representatives.
Treasury Secretary Janet Yellen wrote in a letter to House Speaker Kevin McCarthy that the US will hit the debt ceiling on Jan. 19, at which point “extraordinary measures” will be required. The Treasury Department will take these steps, but only for a limited time, she said.
Yellen wrote that the government was unlikely to run out of cash and “extraordinary measures” before early June, although she said there was “considerable uncertainty” in the forecast. She urged lawmakers to “act in a timely manner” to raise or suspend the debt ceiling.
“Failure to meet government obligations will cause irreparable damage to the U.S. economy, the livelihoods of all Americans, and global financial stability,” she wrote.
The debt ceiling is the maximum amount the federal government is allowed to borrow, after Congress set a level more than a century ago to limit government borrowing. Congress has raised the debt ceiling in the past to avert a U.S. debt default, which economists have warned would be “financial Armageddon.” That’s what lawmakers did in late 2021 after the last debt-ceiling impasse.
Immediate steps include some accounting manipulations involving the Civil Service Retirement and Disability Fund, the Postal Service Retirees Health Benefit Fund and the FERS Thrift Savings Plan.
However, experts say the moves won’t affect the ability of retirees to withdraw their savings. Those funds will all be available once the impasse is resolved, Yellen wrote.
Yellen’s letter emphasized that the debt ceiling is an issue that Congress must address as soon as possible.
But it’s not a pressing issue, experts say.
“This is not the time to panic. We are months away from the U.S. failing to meet all of its obligations,” said Shai Akabas, director of economic policy at the Bipartisan Policy Center. “But now is certainly the time for policymakers to start serious negotiations.”
How long the Treasury can keep the “extraordinary measures” in place will depend in part on the 2022 tax revenues collected by the government this spring. In addition, inflation and interest rates are rising faster than some experts estimated last year, and the introduction of new policies, including student loan forgiveness programs, could shorten the window.
House Republicans are preparing contingency plans, but dealing with the debt ceiling will not be an easy task for Congress, especially now that Republicans control the House. That is expected to spark a fight between members of the conservative Republican Party, who want to tie the lifting of any restrictions to spending cuts, and Democrats, who strongly oppose any cuts.
The Washington Post first reported the contingency plans.
Republican Rep. McCarthy, as part of his negotiations to become Speaker, pledged to pass a proposal by the end of March telling the Treasury Department which payments should be prioritized if the debt ceiling is breached. Chip Roy confirmed the news to CNN.
Roy, one of the main players in the McCarthy standoff for the speakership, cautioned that the proposal’s outlines are still being worked out, noting that several different versions of the payment prioritization plan are circulating among House Republicans.
McCarthy was caught in the middle, with his party holding a slim majority in the Senate. In addition, any member can ask for a motion to cede the speaker’s seat, one of several concessions McCarthy made to secure the top job after 15 ballots last week.
At Thursday’s news conference, McCarthy took a tough line on the debt ceiling.
Asked whether he could guarantee that Republicans would provide the votes needed to raise the debt ceiling, McCarthy said: “We don’t want to put any fiscal problems on our economy, and we won’t, but the fiscal problems will continue as usual. .”
McCarthy also said he “had a very good conversation with the president when he called me, and I told him I wanted to sit down with him earlier to address these challenges.”
Republicans will not allow “money to be wasted,” he said.
On Friday, Senate Majority Leader Chuck Schumer told CNN that he thinks Republicans will eventually “get it” and raise the cap.
“If you’re worried about inflation, a default would be huge,” Schumer said.
Further complicating the situation is the fact that Debt ceiling talks could be tied to a federal spending plan for fiscal year 2024, which Congress must pass by Oct. 1 or risk a government shutdown.
The debt ceiling was last raised in December 2021 to $31.4 trillion.
The deadline came earlier than some experts expected. They don’t expect the debt ceiling to be breached until later this year, at which point the Treasury will have to start taking extraordinary measures to keep the government from defaulting on its debt.
Goldman Sachs warned last month that a near exit could unleash turmoil on Wall Street, leading to losses in retirement accounts and portfolios for ordinary Americans.
“Uncertainty over the 2023 debt ceiling appears likely to lead to significant volatility in financial markets,” Goldman economists wrote, noting that the 2011 standoff led to a sharp sell-off in U.S. stocks.
Markets aside, Goldman Sachs said a failure to raise the debt ceiling in a timely manner “would pose a greater risk to government spending and ultimately economic growth than to U.S. Treasuries themselves.”
This is because in order to avoid defaulting on the US debt, the federal government transfers funds to continue paying the interest on US Treasuries. That would create a huge hole that would need to be filled by postponing a host of other payments — including payments that millions of Americans depend on, such as federal employee salaries, veterans’ benefits and Social Security payments.
“Failure to make timely payments could severely hit consumer confidence,” Goldman Sachs wrote.
The White House said on Friday that it would not make any concessions or negotiate on raising the debt ceiling.
“We’re not going to have any negotiations on the debt ceiling, but broadly speaking, as the new Congress begins, we’re reaching out to all members … to make sure we connect with these new members,” White House press secretary Karin Jean said. – said Pierre.
She has said in the past that “there’s bipartisanship in raising the debt ceiling, and that’s how it should be.”
“This shouldn’t be a political football,” she added. “This is not a political game and it should be played without conditions.”
Asked why Yellen had notified Congress six days before the debt ceiling was hit, Jean-Pierre referred the questions to the Treasury Department but said “the sooner Congress acts the better.”
“Even the prospect of not raising the debt ceiling undermines the entire confidence and credibility of our country,” she said. “There will be no negotiations on this, it’s something that has to be done.”
This story has been updated with additional reporting.