Treasury Secretary Janet Yellen on Friday urged congressional leaders to suspend or raise the national debt limit before Aug. 1. or face dire economic consequences.
Yellen warned that if Congress does not take action, her department will need to implement “extraordinary measures” to prevent the government from defaulting on its loans.
“If Congress has not acted to suspend or increase the debt limit by Monday, August 2, 2021, Treasury will need to start taking certain additional extraordinary measures in order to prevent the United States from defaulting on its obligations,” Yellen wrote in a letter to congressional leaders.
The debt ceiling is a legal limit on the amount of borrowing the Treasury can do. When the federal government spends more than it collects, it borrows money to cover the difference, commonly by issuing IOUs in the form of U.S. Treasury securities.
By end of 2020, the federal government had hit its debt limit of $22 trillion and as of June 30, an additional $6.5 trillion had been borrowed, bringing the total federal debt to $28.5 trillion.
Under President Donald Trump, Congress, through the Bipartisan Budget Act of August 2019, which is set to expire on July 31, suspended the United States’ borrowing. The Biden Administration has yet to reveal its plan to deal with the national debt limit.
Yellen clarified that congressional action to increase the debt limit does not authorize additional spending, rather it “simply allows Treasury to pay previously enacted expenditures.”
If Congress is unable to increase the debt limit, the Treasury would be forced to try to suspend certain payments such as to Social Security beneficiaries, government employees, or service members in order to save cash.
“Failure to meet those obligations would cause irreparable harm to the U.S. economy and the livelihoods of all Americans. Even the threat of failing to meet those obligations has caused detrimental impacts in the past, including the sole credit rating downgrade in the history of the nation in 2011,” wrote Yellen.
“The period of time that extraordinary measures may last is subject to considerable uncertainty due to a variety of factors, including the challenges of forecasting the payments and receipts of the U.S. government months into the future, exacerbated by the heightened uncertainty in payments and receipts related to the economic impact of the pandemic,” Yellen continued in the letter.
The Congressional Budget Office (CBO) said on Wednesday that even with the extraordinary measure, the U.S. Treasury Department is projected to exhaust its debt limit by October or November.
“The timing and size of revenue collections and outlays over the coming months could differ noticeably from CBO’s projections. Therefore, the extraordinary measures could be exhausted, and the Treasury could run out of cash, either earlier or later than CBO projects,” the office said in its report.
Meanwhile, Democrats are seeking to spend trillions more while Republicans oppose any huge funding packages that are not specifically targeted to fix immediate problems. Senate Minority Leader Mitch McConnell (R-Ky.) has indicated GOP members would not vote in favor of raising the debt ceiling.
“I can’t imagine there will be a single Republican voting to raise the debt ceiling after what we’ve been experiencing,” McConnell told Punchbowl News in an interview published Wednesday. “I can’t imagine a single Republican in this environment that we’re in now—this free-for-all for taxes and spending—to vote to raise the debt limit,” he said.
Meanwhile, House Speaker Nancy Pelosi (D-Calif.) told Bloomberg that Democrats are “considering all the options,” in a brief interview with Bloomberg in early July.
White House Press Secretary Jen Psaki said Friday that it is common practice for the Treasury Secretary to send such letters and the U.S. government has never allowed a debt default.
“We expect Congress to act promptly to raise or suspend” the debt limit and “protect the full faith and credit of the United States,” Psaki told reporters.