US politics & policy updates
Sign up to myFT Daily Digest to be the first to know about US politics & policy news.
Janet Yellen has warned the US Treasury risks running out of cash next month unless Congress increases its borrowing limit, as Joe Biden’s administration grows increasingly worried about a possible debt default.
In a letter to congressional leaders on Wednesday, the 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 October.
“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,” Yellen added.
The mounting risk of a US sovereign debt crisis as early as next month complicates Biden’s efforts to pass his multitrillion-dollar economic agenda through Congress in the coming weeks. It also comes as the president grapples with the impact of the spread of the Delta coronavirus variant across the country, and the fallout from the chaotic and deadly pullout from Afghanistan last month — both of which have dented his popularity.
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.
But Republican lawmakers have recently resisted raising it when the White House is controlled by Democrats, often demanding conditions that have triggered impasses on Capitol Hill and occasionally bringing the US to the brink of default. Stand-offs over the debt limit are sometimes dismissed as political theatre that is ultimately resolved but top Biden administration officials view the stand-off with increasing seriousness.
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”.
“At a time when American families, communities, and businesses are still suffering from the effects of the ongoing global pandemic, it would be particularly irresponsible to put the full faith and credit of the United States at risk,” she added.
An increase in the 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 $3.5tn 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 22. 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 boost the Internal Revenue Services’ enforcement of tax laws for the wealthy to pay for its large spending plans.
Sarin said the wealthiest 1 per cent of Americans were not paying more than $160bn 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,” Sarin said.