The U.S. has begun taking “extraordinary measures” to avoid spending that would breach the country’s $31.4 trillion debt ceiling, Treasury Secretary Janet Yellen told lawmakers Thursday, touching off a Washington debate on how to avoid a default on the government’s financial obligations and calamity for the global economy.
The Treasury chief said she has started to suspend investments in the Civil Service retirement fund for government workers and a retiree health plan for postal workers that weren’t immediately needed to pay beneficiaries but warned those measures were only a stopgap until June 5.
Yellen told key congressional leaders they need to increase the government’s debt ceiling, which has been done 78 times since 1960 — or, less likely — do away with any spending limit, which is the practice in most countries throughout the world.
The U.S. government routinely fails to balance its annual budget, often spending $1 trillion or more than it collects in taxes, and then reaches its debt ceiling set by Congress and agreed to by sitting presidents.
The U.S. has never defaulted on its worldwide financial commitments, such as to China, Japan and other countries that have bought its debt, or on obligations to some taxpayers, such as pension and health care payments to older Americans.
But the political debate in the U.S. over increasing the debt limit to make payments on spending already approved by Congress and a succession of presidents has often intertwined with heated discussions over future spending, leading to a standoff as spending approaches the debt ceiling.
Once such stalemate occurred in 2011, when Democratic President Barack Obama eventually reached agreement with Republican congressional opponents to increase the debt ceiling while also curbing spending for much of the past decade.
Now, the newly empowered but narrow Republican majority in the House of Representatives is similarly calling for future spending cuts to keep 2024 discretionary federal spending for government agencies at 2022 levels.
House Speaker Kevin McCarthy told reporters this week, “I don’t see why you would continue the past behavior.”
But the White House is balking and instead demanding a “clean vote” on increasing the federal debt ceiling that is not linked to new spending totals. President Joe Biden said he will not curb pension and health care assistance for older Americans.
“Americans have every right to expect that Congress will come together as they have dozens and dozens and dozens of times before in a bipartisan fashion to make sure we keep the American economy on this stable path,” White House spokeswoman Olivia Dalton told reporters aboard Air Force One as they accompanied Biden to California to view storm damage in the state.
No negotiations have been held with congressional leaders.
If the government defaults — essentially running out of money to pay its debts — payments to U.S. bond holders, foreign governments and individual Americans alike, would be delayed until a new debt ceiling is reached. So could paychecks to government workers and monthly payments to pensioners and health care providers.
In addition, the credit rating of the U.S. could be cut, and stock markets destabilized, as occurred in 2011.
Yellen warned that Congress needs to act to avoid such financial turmoil.
“The period of time that extraordinary measures may last is subject to considerable uncertainty, including the challenges of forecasting the payments and receipts of the U.S. Government months into the future,” she told congressional leaders. “I respectfully urge Congress to act promptly to protect the full faith and credit of the United States.”