The Treasury Department said on Friday the US could default on its debt as soon as June, setting up one of the first major battles on Capitol Hill after Republicans took control of the House.
The US will reach its debt ceiling on January 19 and then “extraordinary measures” will have to be taken, Treasury Secretary Janet Yellen wrote in a letter to House Speaker Kevin McCarthy. He added that the Treasury Department will follow up on this, but it will take some time.
It is unlikely that the government will spend its money and “extraordinary measures” in early June, although she said there is “high uncertainty” about that information, Yellen wrote. He urged lawmakers to “take timely action” to extend or freeze the debt.
He wrote: “Failure to meet the government’s demands could harm the US economy, the lives of all Americans, and global financial stability.”
The debt limit is the amount the federal government is allowed to borrow, enacted by Congress more than a century ago to limit federal borrowing. Congress has raised the debt in the past to avoid a US debt default that economists have warned is a “fiscal Armageddon.” That’s what lawmakers did in late 2021 following a final deal on the debt settlement.
Recent developments include other funding options including the Civil Service Retirement and Disability Fund, the Postal Service Retiree Health Benefits Fund and the Federal Employees Retirement System Thrift Savings Plan.
However, the move will not affect retirees’ ability to access their savings, experts said. The funds will be withdrawn only after the dispute is resolved, Yellen wrote.
Yellen’s letter reaffirmed that the debt ceiling is a problem that Congress must address soon.
But it is not the same problem, experts said.
“This is not the time to panic. “We have many months left before the U.S. is able to meet all of its obligations,” said Shai Akabas, director of economic policy at the Bipartisan Policy Center.
The timing of the Treasury Department’s “extraordinary measures” will depend on the amount of the 2022 tax bill that the state takes in this spring. Also, inflation and interest rates have been higher than some experts expected last year, and new policies, including a student loan forgiveness program, have been introduced, which could shorten the window.
However, dealing with the debt ceiling will not be an easy task for Congress, especially since Republicans took control of the House. It is expected to lead to a battle between conservative GOP members, who want to tie the cap removal to spending cuts, and Democrats, who strongly oppose any cuts.
McCarthy is in the middle, and his party has the fewest scissors in the room. Also, any member can call for his resignation as speaker, one of several steps McCarthy took to win the top job after 15 votes last week.
Additionally, the debt negotiations could be tied to the 2024 federal spending bill, which Congress must pass before October 1 or risk a government shutdown.
The debt was last raised in December 2021 to $31.4 trillion.
The deadline is coming sooner than some experts expected. They predict that the debt ceiling will not be broken until the end of this year, when the Treasury Department will begin to take steps to prevent violations of the government’s commitments.
Goldman Sachs warned last month that the call could cause chaos on Wall Street that would lead to losses in the retirement accounts and savings of everyday Americans.
“It appears that uncertainty about the credit rating in 2023 could lead to instability in financial markets,” Goldman Sachs economists wrote, noting that the 2011 crisis led to a rally in the US stock market.
Beyond the markets, Goldman Sachs said that failure to raise the debt over time “would pose a greater threat to government spending and economic growth than it would to Treasury institutions alone.”
This is because in order to avoid defaulting on the US debt, the government changes the currency to pay interest to the Treasury. That would create a huge hole that would need to be filled by delaying many other expenses — including things millions of Americans depend on like wages for government workers, benefits for veterans and Social Security payments.
Goldman Sachs wrote: “Failure to pay on time can undermine consumer confidence.
The White House said Friday it would not offer any options or negotiations on raising the debt.
“We will not be discussing the debt, but to put it briefly, at the beginning of this new Congress, we are reaching out to all members… Press secretary Karine Jean-Pierre said.
He said that in the past “there has been bipartisan agreement on raising the debt, and that’s how it should be.”
“It shouldn’t be a political football,” he added. “This is not a political game, and this should be done without conditions.”
When asked why Yellen notified Congress six days before the loan was due, Jean-Pierre referred the questions to the Treasury, but said “Congress will soon do better.”
“Even the prospect of not raising the debt will destroy all faith and the reputation of our country,” he said. “There will be no discussion about this, this is something that has to be done.”
This article has been updated with additional reporting.