Yellen announces to Congress that the United States will no longer have the flexibility of the debt ceiling on October 18
Paschal Donohoe, Irish Minister of Finance, left, and Janet Yellen, US Secretary of the Treasury, arrive at a meeting of the Eurogroup of European Union (EU) Finance Ministers in Brussels on July 12, 2021 (Valeria Mongelli / Bloomberg)
WASHINGTON (Reuters) – Treasury Secretary Janet Yellen told Congress on Tuesday that the United States will lack flexibility to avoid exceeding the debt ceiling on October 18, setting a new deadline for lawmakers to avoid a default catastrophic payment of their payment obligations.
“It is not certain that we can continue to meet all of the nation’s commitments after this date,” Yellen wrote in the letter to House Speaker Nancy Pelosi, D-Calif.
Yellen’s letter came less than 24 hours after Senate Republicans blocked a bill that would suspend the debt ceiling and prevent a government shutdown on Friday. Senate Republicans have said they will support a stand-alone measure to prevent the shutdown, but they largely opposed Democrats’ efforts to suspend the debt ceiling.
The US government has a large budget deficit, spending far more than it brings in on tax revenues. To remedy this imbalance, the government borrows money by issuing debt. But it can only issue debt up to a limit set by Congress. This limit is raised or suspended several times, and lawmakers now face another cap.
If Congress does not increase the limit, the Treasury Department will not have the capacity to pay all of its bills. Yellen’s new letter says this crisis will really tighten after October 18. She called on Congress to act as quickly as possible, an opening she tried for weeks without much success.
Yellen’s letter pointed out that even narrowly avoiding a default could hurt taxpayers. The uncertainty surrounding the ability of the United States to meet its payment obligations could make investors more nervous about buying U.S. debt, which would increase borrowing costs for taxpayers.
“We know from previous deadlocks around debt limits that waiting until the last minute can seriously damage business and consumer confidence, increase borrowing costs for taxpayers, and have a negative impact on the credit rating of the United States for years to come, ”she wrote in the letter. “Failure to act quickly could also lead to substantial disruption in financial markets, as increased uncertainty can exacerbate volatility and erode investor confidence.”
Economists said the US economy would be plunged into an economic recession if the debt ceiling was exceeded. A Moody’s Analytics report found that a default could cost the economy around 6 million jobs and wipe out up to $ 15 trillion in household wealth.
Democrats in Congress are expected to try to pass the GOP’s vote-less measure after Republicans defeat the attempt to do so on a bipartisan basis. Budget experts have said the process of passing the debt ceiling hike could take Democratic lawmakers up to two weeks and comes at a time when Democrats are simultaneously trying to push Biden’s sprawling economic agenda forward. This should give them enough time to raise the debt ceiling, but very few mistakes.
While Yellen’s letter highlighted the October 18 date, she pointed out that fluctuations in the federal government’s cash flow – exacerbated by the pandemic – make accurate forecasting difficult.
“Estimates regarding the duration of our extraordinary measures and our remaining cash flow may move unpredictably forward or backward,” she wrote. “This uncertainty underscores the critical importance of not waiting to increase or suspend the debt limit.”