US Treasury Secretary Janet Yellen said the government will run out of money to meet its fiscal obligations by June 5 if the current spending limit of $31.4 trillion is not raised before then.
Yellen announced in a letter to Congress on Friday that the deadline for a potential default was pushed back from an earlier estimate that the Treasury could run out of cash as early as June 1.
“During the week of June 5, the Treasury Department planned approximately $92 billion in payments and transfers,” Yellen wrote in the letter, including nearly $36 billion in quarterly adjustments to Social Security and Medicare trust funds.
“As a result, our projected resources will not be sufficient to meet all of these obligations,” she said.
The extended deadline gives lawmakers more breathing room as they try to reach a deal on raising U.S. spending limits.
Congress is tasked with raising the nation’s debt ceiling, and Republican lawmakers have used their majority in the U.S. House of Representatives as leverage to demand cuts to social programs in exchange for raising the ceiling if default looms.
Where do things stand?
Republican House Majority Leader Kevin McCarthy has been negotiating with President Joe Biden’s administration for the past few weeks, trying to strike a deal and avoid a default that experts say could be devastating for the U.S. and global economies.
Earlier on Friday, McCarthy said negotiators were trying to “get the job done” but didn’t know if a deal would be reached within 24 hours.
The two sides are considering a deal that would raise the debt ceiling for two years — until after the next presidential election — cut spending through 2024 and cap spending growth by 1% in 2025.
It’s unclear whether the relaxed deadline will give lawmakers room to hammer out final details, or whether conservatives will stick around and use the extra time to push for bigger concessions and spending cuts. Most lawmakers have left for Memorial Day weekend, but they have been warned they will need to return to Washington, D.C., to vote on a deal if a deal is reached.
The debt ceiling has been raised 78 times since 1960 — 49 under Republican presidents and 29 under Democratic presidents, according to Treasury Department data.
What do the parties want?
Republicans have pushed for stricter requirements on benefits such as food aid and health care for low-income recipients — who the Republicans want to have jobs — saying the country must lower spending levels.
Democrats resisted the entitlement program’s new job requirements and were quick to point out that Republicans appeared to have shown little concern about raising spending limits under former President Donald Trump.
On Thursday, news outlets reported that McCarthy and Biden were close to reaching a deal that would reportedly include increased military spending and recouping unspent COVID-19 relief funds currently set aside for things like disaster relief and vaccine research, And cut funding to the IRS (Internal Revenue Service).
Most importantly, the deal will reportedly include caps on nonmilitary discretionary spending on housing, education, road safety and other federal programs.
While the spending cap would likely represent an actual cut to the social safety net program, such a deal would likely be more popular with Democrats than the steep cuts Republicans had previously proposed, given rising inflation.
What happens if the US fails to meet the deadline?
The risk of default is also considerable, with Yellen previously warning that a default would be an “economic and financial disaster” that would “permanently raise the cost of borrowing”.
Some rating agencies have warned they could downgrade the United States’ credit rating, which would drive up borrowing costs and weaken the country’s global standing.
When Republicans also pushed for spending cuts in exchange for raising the debt ceiling in 2011 — and triggered the temporary suspension of several government services — the Government Accountability Office found that delaying raising the cap cost the U.S. about $1.3 billion in a year. borrowing costs.
A recent analysis by the Brookings Institution, a US think-tank, found that the lower borrowing rates the government currently enjoys will save it about $50 billion next year and more than $750 billion over the next 10 years. The analysis noted that the cost to taxpayers could be significant if “the debt ceiling is allowed to be constrained at the expense of some of the advantages”.
A separate report by economic analysis group Moody’s similarly found that failure to reach a deal by the deadline could lead to a 1.6% increase in unemployment, even if the cap is raised shortly thereafter.
What impact a default would have on government services and which payments the Treasury would prioritize also remains an open question.
In 2011, the agreement was reached two days before the Treasury estimated it would run out of funds to meet its financial obligations.
Since 1789, the United States has met its financial commitments by paying its bills on time. Congress has blocked default 78 times. They have to do it again. pic.twitter.com/azPjhFdUry
— Secretary of State Janet Yellen (@SecYellen) May 22, 2023
At the time, the Treasury Department planned to prioritize interest and principal payments, potentially delaying other obligations such as retirement benefits, health care and military pay.
The Biden administration has not yet specified which payments it would prioritize in the event of a default.
However, a recent NPR report found that $12 billion in veterans benefits and $47 billion in Medicare provider benefits will expire on June 1, and $25 billion in Social Security benefits will expire on June 2. due, and $4 billion in federal payroll due June 9.
In the event of a default, these payments may not be honored.
“Failure by Congress to raise the debt ceiling would impose severe hardship on American families, undermine our global leadership, and raise questions about our ability to defend our national security interests,” Yellen wrote in the letter. “I continue to urge Congress will act as quickly as possible to protect the full confidence and credibility of America.”