Janet Yellen has warned that the US treasury will run out of cash next month unless Congress increases the borrowing limit, as Joe Biden's administration grows increasingly worried about a possible debt default.
In a letter to congressional leaders on Wednesday, the US treasury secretary said she could not offer “a specific estimate” of when it would run out of cash, but the “most likely outcome” was that its coffers would be “exhausted during the month of October”.
Increasing the US debt limit used to be a routine affair for Congress, allowing the treasury to pay the bills for spending already approved by lawmakers.
Since Barack Obama's presidency, however, Republican lawmakers have resisted increasing the debt limit when the White House is controlled by Democrats, often demanding conditions that triggered impasses on Capitol Hill and occasionally bringing the US to the brink of default.
Ms Yellen wrote in her letter to congressional leaders that even “waiting until the last minute” to avert a debt limit crisis could cause “serious harm to business and consumer confidence, raise short-term borrowing costs for taxpayers, and negatively impact the credit rating of the United States”.
Further, “a delay that calls into question the federal government’s ability to meet all its obligations would likely cause irreparable damage to the US economy and global financial markets”, she added.
An increase in the US debt limit could be passed as a standalone Bill, although it is more likely to be attached to other economic and budgetary legislation that is being considered by Congress in the coming weeks.
This includes the $3.5 trillion (€3 trillion) social safety net expansion that is expected to garner only Democratic votes, and a government funding Bill to avoid a shutdown.
The looming debt limit deadline is being closely watched among investors, economists and strategists. Lou Crandall, chief economist at Wrightson ICAP, said the treasury was on course to run out of money by October 22nd. In the weeks leading up to that so-called “drop-dead date”, it is likely to be forced to cut back further on issuing new US government debt securities.
The treasury is also trying to influence the fiscal negotiations. Natasha Sarin, its deputy assistant secretary for economic policy, on Wednesday released a blog post championing the administration’s efforts to ramp up the Internal Revenue Services’ enforcement of tax laws for the wealthy to pay for its large spending plans.
Ms Sarin said the wealthiest 1 per cent of Americans were not paying more than $160 billion (€135 billion) in owed taxes annually.
“These unpaid taxes mean policymakers must choose between rising deficits, lower spending on important priorities, or further tax increase to compensate for lost revenue – which will only be borne by compliant taxpayers,” Ms Sarin said.
– Copyright The Financial Times Limited 2021