Debt ceiling: US could run out of cash by June 1, Yellen warns

WASHINGTON — Treasury Secretary Janet L. Yellen said Monday that the United States could run out of money to pay its bills by June 1 if Congress doesn’t raise or suspend the debt limit, putting pressure on President Biden and lawmakers to reach an agreement quickly to avoid defaulting on the nation’s debt.

The more accurate warning of when the United States could reach the so-called X-date dramatically reduces the projected time lawmakers will have to reach a deal before the government runs out of money to pay all of its bills on time . The new schedule could force a spate of negotiations between the House, Senate and White House over government spending — or a high-stakes standoff between Mr. Biden and House Republicans, who have refused to raise the limit without the deep spending cuts involved.

Economists have warned that failure to raise the debt ceiling, which caps the total amount of money the United States can borrow, threatens to shake financial markets and plunge the global economy into a financial crisis. Because the United States runs a budget deficit – meaning it spends more money than it earns – it has to borrow huge sums of money to pay its bills. The government must make interest and other payments to the bondholders who own their debt.

The Treasury Department had previously forecast that it could run out of money sometime in early June, but the new estimate raises the alarming prospect that the United States might not be able to make some payments, including to bondholders, within weeks.

“Given the current projections, it is imperative that Congress act as quickly as possible to raise or suspend the debt limit at a level that provides longer-term certainty that the government will continue to make its payments,” Ms Yellen said in a letter to the congress.

The Congressional Budget Office also warned on Monday that time was running out faster than previously thought. The bipartisan Budget Office said tax receipts from income payments processed in April were lower than expected and future tax payments are unlikely to have a major impact.

“Combined with lower-than-expected revenue through April, this means Treasury Department extraordinary measures will be exhausted sooner than we previously forecast,” wrote Phillip Swagel, the CBO director, in an analysis available on the agency’s website has been published.

White House officials did not expect the date of a potential default to arrive so soon, and the accelerated timeline could throw off the president’s approach to the potential crisis.

Mr. Biden has continued to insist he will not negotiate the limit directly, saying Congress must do so unconditionally. But he has been preparing to meet with Democrat and Republican leaders, including Speaker Kevin McCarthy, at the White House to discuss taxes and spending. Many government officials have expressed optimism that these talks could result in a tax deal that could also lead to a debt ceiling hike.

The newly condensed calendar leaves little time for the president and congressional leaders to agree on raising the limit. Mr McCarthy is traveling to the Middle East this week. Later this month, Mr. Biden is scheduled to attend the Group of 7 Nations Summit in Japan and then travel to Australia for a summit with the leaders of Japan, India and Australia.

House Republicans passed legislation in April that would raise the debt ceiling in exchange for deep spending cuts and roll back recent climate legislation that Democrats had passed along the party line. Mr. Biden blasted that law, saying it would harm working families while benefiting the oil and gas industry, and he has accused Republicans of jeopardizing America’s economy.

On Monday, the President urged Republicans to “make sure the House Speaker’s threat to default on the federal debt is off the table.”

“For over 200 years, America has never, ever defaulted on its debts. To say it with the capital: America is not a dead nation colloquially. We have never failed to pay the debt,” Biden said.

While there is bipartisan agreement that the nation needs to find a way to narrow the gap between spending and revenue, even the most ardent supporters of tax reform say the debt ceiling needs to be raised.

“We need to raise the debt limit as soon as possible, without drama and without serious risk of default,” said Maya MacGuineas, chair of the Federal Budget Committee. “Threatening default or dragging oneself is the height of irresponsibility. Lawmakers must start serious talks immediately.”

The possibility of a June 1 default could force lawmakers to agree to a near-term increase or suspension of the debt limit to allow more time for negotiations. But even this temporary reassurance is far from assured given competing factions within the Republican Party.

The United States technically hit its $31.4 trillion debt ceiling in January, forcing the Treasury Department to use accounting maneuvers known as extraordinary measures to allow the government to keep paying its bills, including payments to bondholders, the federal debt own. Ms Yellen said at the time her powers to delay a default – where the United States fails to make its payments on time – could be exhausted by early June. However, she warned that the estimate is fraught with significant uncertainties.

Tax revenues depend on a complicated set of factors, such as the unemployment rate, wages and taxpayers’ filing of tax returns. On Monday, the Treasury Secretary underscored the challenges in predicting the default date, noting that the new estimate is based on currently available data that is inherently variable, such as: B. Tax payments by individuals.

“The actual date that Treasury will exhaust exceptional measures could be a few weeks later than these estimates,” Ms Yellen said.

Mr Biden has said he will meet with Mr McCarthy to discuss government spending and the budget. But he has insisted that raising the debt limit is non-negotiable and has urged Republicans to lift the credit limit unconditionally.

“The most important thing we need to do in this regard is to make sure the House Speaker’s threat to default on the national debt is off the table,” Biden said in a speech at the White House on Monday. “For over 200 years, America has never, never, never paid its debts.”

A Treasury Department official said the government had about $300 billion in cash on hand as of April 30. Ms Yellen’s ability to delay a default will depend in part on how much tax revenue the federal government receives this spring.

Payments for the 2022 tax year are still being received. Goldman Sachs economists last week forecast that the Treasury Department could have about $60 billion in cash by the second week of June, which would allow the government to continue its payments through the end of July.

Some fiscal analysts have suggested that winter storms could hamper the Treasury Department’s ability to delay a default. Severe storms, flooding and mudslides in California, Alabama and Georgia this year prompted the Internal Revenue Service to extend the filing deadline from April 18 to October for dozens of counties.

The IRS also gave affected areas more time to make contributions to retirement and health savings accounts, potentially affecting their taxable income.

Ms Yellen has already taken steps to ensure the federal government has sufficient coffers.

Earlier this year it announced that it would repay some existing investments and suspend new investments in the Civil Service Pension and Disability Fund and the Health Fund for Postal Service Retirees.

Ms Yellen said on Monday that the Treasury Department is suspending government and local government bond issuance to deal with the risks associated with the debt limit. She lamented that the move would deprive state and local governments of an important tool to manage their finances.

Brinkmanship over the debt limit has reignited debates about how far the executive branch can go to avoid a default. But Ms Yellen has dismissed the notion that she could prioritize certain payments or mint a $1 trillion platinum coin to ensure the United States stays solvent.

Although markets have remained largely calm on the prospect of a default, there are some signs that investors are getting nervous.

They’ve been selling Treasury bonds maturing in three months — around the time policymakers were saying the United States might run out of money — and buying up bonds with just a month to maturity.

The cost of insuring existing bond holdings against the possibility of a US default has also risen sharply. However, some analysts say the market reaction would need to be much more pronounced to force a quick deal.

In a separate Treasury Department report Monday on the risks to the economy, Assistant Secretary of State for Economic Policy Eric Van Nostrand outlined the dire consequences of not raising the debt limit.

“A default by the US government — including failure to pay any of the United States’ obligations — would be an economic catastrophe and trigger a global downturn of unknown but significant severity,” Van Nostrand said.