The Treasury Department said Friday the US will reach the debt limit on January 19 and “extraordinary measures” will need to be taken, setting up one of the first major battles on Capitol Hill after Republicans took control of the House.
The debt limit is the maximum that the federal government is allowed to borrow, after Congress set a level more than a century ago to curtail government borrowing. Congress has in the past raised the debt limit to avoid a default on US debt that economists have warned would be “financial Armageddon.” That’s what lawmakers did in late 2021 following the last standoff over the debt ceiling.
“Presidents and Treasury secretaries of both parties have made clear that the government must not default on any obligation of the United States, and, as noted, Treasury secretaries in every administration over recent decades have used these extraordinary measures when necessary,” Treasury Secretary Janet Yellen wrote in a letter to House Speaker Kevin McCarthy on Friday. “Yet the use of extraordinary measures enables the government to meet its obligations for only a limited amount of time.”
“It is therefore critical that Congress act in a timely manner to increase or suspend the debt limit. Failure to meet the government’s obligations would cause irreparable harm to the US economy, the livelihoods of all Americans, and global financial stability,” Yellen wrote.
However, Yellen also wrote that it’s unlikely that cash and “extraordinary measures” would be exhausted before early June.
The deadline comes far sooner than some experts had expected. They were predicting the debt ceiling limit would not be breached until later this year, when the Treasury Department would have to start taking extraordinary measures to avoid defaulting on the government’s obligations.
The debt ceiling was last raised in December 2021 to $31.4 trillion.
Yellen said the immediate measures would mean the US would redeem existing investments and suspend new investments of the Civil Service Retirement and Disability Fund and the Postal Service Retiree Health Benefits Fund. Reinvestments in the Government Securities Investment Fund of the Federal Employees Retirement System Thrift Savings Plan would also be suspended. Those funds would be made whole once the impasse is settled.
However, these are accounting maneuvers and will not affect retirees’ ability to access their savings, experts said.
Yellen’s letter reinforced that the debt ceiling limit is an issue that Congress will have to deal with.
But it’s not an immediate problem, experts said.
“This is not the time for panic. We are many months away from the US being unable to meet all of its obligations,” said Shai Akabas, director of economic policy at the Bipartisan Policy Center. “But it is certainly a time for policymakers to begin negotiations in earnest.”
Just how long the Treasury Department can continue the “extraordinary measures” will depend in part on how much 2022 tax revenue the government collects this spring. Also, inflation and interest rates have risen faster than some experts estimated last year, and new policies, including the student loan forgiveness program, were introduced, potentially shortening the window.
However, dealing with the debt ceiling limit will not be an easy task for Congress, especially now that the Republicans took control of the House. It is expected to unleash a battle between conservatives GOP members, who want to tie any lifting of the limit to spending cuts, and Democrats, who fiercely oppose any reductions.
McCarthy is stuck in the middle, with his party holding only a razor-thin majority in the chamber. Also, any member can call for a motion to vacate the speaker’s chair, one of several concessions McCarthy made to gain the top post after 15 rounds of voting last week.
What’s more, the debt ceiling negotiations will likely be tied to the fiscal year 2024 federal spending package, which Congress must pass before October 1 or risk a government shutdown.
Goldman Sachs warned last month that a close call could set off turmoil on Wall Street that causes losses in the retirement accounts and investment portfolios of everyday Americans.
“It seems likely that uncertainty over the debt limit in 2023 could lead to substantial volatility in financial markets,” Goldman Sachs economists wrote, noting that the 2011 standoff helped cause a deep selloff in the US stock market.
Beyond markets, Goldman Sachs said a failure to raise the debt limit in time “would pose greater risk to government spending and ultimately to economic growth than it would to Treasury securities themselves.”
That’s because in order to avoid a default on US debt, the federal government would shift money around to keep paying interest on Treasuries. That would create a massive hole that would need to be filled by delaying a host of other payments — including ones that millions of Americans count on such as paychecks to federal employees, benefits to veterans and Social Security payments.
“A failure to make timely payments would likely hit consumer confidence hard,” Goldman Sachs wrote.
The White House said Friday it will not offer any concessions or negotiate on raising the debt ceiling.
“We will not be doing any negotiation over the debt ceiling, but broadly speaking, at the start of this new Congress, we’re reaching out to all the members … making sure that we have those connections with those new members,” White House press secretary Karine Jean-Pierre said.
She said in the past “there’s been a bipartisan cooperation when it comes to lifting the debt ceiling, and that’s how it should be.”
“It should not be a political football,” she added. “This is not political gamesmanship, and this should be done without conditions.”
Asked why Yellen was notifying Congress just six days before the debt limit is reached, Jean-Pierre referred those questions to Treasury, but said the “sooner Congress acts the better.”
“Even the prospect of not raising the debt ceiling will damage the full faith and the credit of our nation,” she said. “There’s going to be no negotiation over it, this is something that must get done.”
This story has been updated with additional reporting.