US Treasury Secretary Janet Yellen has said the government will run out of money to meet its fiscal debt by June 5 if the current spending cap of $31.4 trillion is not raised by then.
Yellen’s announcement, which was made in the form of a letter to Congress on Friday, added a deadline for a possible default to earlier estimates that the Treasury Department’s funds could run out as early as June 1. will be postponed.
“During the week of June 5, the Treasury will make an estimated $92 billion in payments and remittances,” Yellen said in the letter, including quarterly adjustments to the Social Security and Medicare Trust Funds of about $360 billion. said to include billions of dollars.
“Therefore, our anticipated resources are insufficient to meet all these obligations,” she said.
The extension will give lawmakers breathing room as they try to reach a deal to raise the US spending cap.
Congress is mandated to raise the national debt ceiling, and Republicans are leveraging their House majority to demand cuts in social programs in exchange for a higher debt ceiling in the face of imminent debt default.
where is the situation?
House Republican Majority Leader Kevin McCarthy has been in talks in recent weeks with the administration of President Joe Biden to reach a deal and avoid a default, but experts say it could be devastating to the U.S. and global economy. He pointed out that it could have an impact.
McCarthy said at a briefing on Friday that negotiators were working to “get the job done” but he wasn’t sure if a deal could be reached within 24 hours.
The two countries are considering a deal that would raise the debt ceiling for two years after the next presidential election, cut spending in 2024 and cap spending growth at 1% in 2025.
It is unclear whether the loosened deadline will give lawmakers more room to work out the final details, or whether conservatives will pursue it further and use the extra time to seek further concessions and spending cuts. Most lawmakers are leaving for Memorial Day weekend, but have been warned they will need to return to Washington, D.C. to vote on the deal if it does.
The Treasury Department says the debt ceiling has been raised 78 times since 1960, 49 under Republican presidents and 29 under Democratic presidents.
What does each party want?
Republicans say they need to cut spending levels and are calling for tougher requirements for benefits such as food aid and health care for low-income people they want to work.
Democrats have resisted the benefits program’s new labor requirements, and they are quick to point out that during the presidency of President Donald Trump, Republicans seemed to show little concern about raising spending limits.
Multiple news outlets reported on Thursday that McCarthy and Biden will increase military spending, withdraw unused COVID-19 relief funds currently set aside for disaster relief, vaccine research, and more. The IRS is said to be nearing an agreement that includes cuts to the Internal Revenue Service.
Most importantly, the deal reportedly includes caps on non-military discretionary spending on things like housing, education, road safety and other federal programs.
Given rising inflation, spending caps are likely to result in effective cuts to social safety net programs, but such a deal would be preferable to Democrats over the drastic cuts previously proposed by Republicans. Probability is high.
What if the US misses the deadline?
The risk of default is also high, with Yellen previously warning that a default would be an “economic and financial catastrophe” and would “permanently increase borrowing costs.”
Some rating agencies have warned that they could downgrade U.S. credit, which could raise borrowing costs and undermine the U.S.’s global standing.
When Republicans also demanded spending cuts in exchange for raising the debt ceiling in 2011, causing the suspension of many government services, the General Accounting Office said the delay in raising the ceiling would cost the United States about $1.3 billion a year in borrowing costs. announced an increase in the dollar. .
A recent analysis by U.S. think tank Brookings found that the government’s current reduction in borrowing rates will save about $50 billion next year and more than $750 billion over the next decade. “If some of this advantage is lost by allowing debt restraint to be binding, the taxpayer burden could be substantial,” the analysis states.
Another report from economic analysis group Moody’s similarly said that if no deal is reached by the deadline, the unemployment rate could rise by 1.6%, even if the cap is raised shortly after.
Questions also remain open about how defaults will affect government services and what payment priorities the Treasury will prioritize.
In 2011, an agreement was reached just two days before the Treasury Department estimated it would run short of funds to meet its financial obligations.
Since 1789, the United States has kept its financial promises by paying bills on time. Congress blocked defaults 78 times. It is imperative that they do so again. pic.twitter.com/azPjhFdUry
— Secretary Janet Yellen (@SecYellen) May 22, 2023
At the time, the Treasury Department planned to prioritize interest and principal payments, while other obligations such as retirement benefits, medical care, and military salaries could be delayed.
The Biden administration did not specify which payments would be prioritized in the event of default.
However, a recent report by National Public Radio in the United States indicated that $12 billion in veterans benefits and $47 billion for Medicare providers would be paid on June 1, and $25 billion in Social Security benefits on June 2. It turned out that $4 billion in federal employee salaries were due to be paid on the day. June 9th.
In the event of default, these payments may not be made.
“If Congress fails to raise the debt ceiling, it will cause serious hardship for American families, undermine our global leadership position, and question our ability to defend our national security interests,” Yellen wrote. will occur.” “I continue to urge Congress to protect America’s trust and credibility by acting as soon as possible.”