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Secretary of the Treasury Janet Yellen warned that the government will soon run out of money to pay its debts, so Congress must determine before the summer recess whether to postpone reinstating the government’s borrowing limit or raise the debt limit so the United States can incur more debt to finance its obligations.
“I respectfully urge Congress to protect the full faith and credit of the United States by acting as soon as possible,” Yellen said in a letter to House Speaker Nancy Pelosi.
The debt limit is a fiscal rule voted on in Congress that determines how much money the government can borrow to operate.
Normally when the government reaches the debt limit, Congress must determine whether to suspend the debt limit temporarily, or extend the debt limit so that the state can continue to meet its financial obligations. Since its creation in 1939 to the present, the debt limit has been raised 98 times by the Congress.
In July 2019 Congress voted to suspend the debt limit until July 31, 2021, so that the U.S. Government could refinance itself. With the advent of the pandemic the Government expanded fiscal spending with three stimulus plans and the United States expanded its debt to levels exceeding the debt acquired during the two world wars combined.
Prior to the suspension of the debt limit, it was set at $22 trillion, however, with the restoration of the rule the limit would be set at around $28 trillion. The last time Congress failed to determine debt limits, in 2011, the United States lost its Triple-A credit rating, as assessed by Standard & Poor’s.
What would happen if Congress does not raise the debt limit or suspend it in time?
In the event that the Department of the Treasury runs out of budget, some government services could stop receiving funding, as well as part of the debt held by the United States could stop being paid on time, which could raise the cost of credit in the United States and therefore make the debt held today by millions of Americans and businesses more expensive, as warned in 2011 by former Secretary of the Treasury, Timothy Geithner.
At the moment, it does not appear that Congress is on the verge of reaching an agreement on the debt limit, so Yellen has announced new measures to be taken by the Treasury so that the U.S. government can continue to finance its operation.
Starting Monday, the Department of the Treasury will suspend reinvestment in a number of pension funds for public employees and postal service workers. The Department of the Treasury has other resources on hand to sustain itself for a time without the need to issue more debt. However, experts estimate that the Treasury could run out of money completely by the fall, before the end of the fiscal year.
Because of the pandemic and the lockdowns, Treasury revenues are still uncertain; the Congressional Budget Office expects approximate collections to be $3.8 billion and the annual deficit to be $3 billion.
The future of the debt limit is subject to two other negotiations in Congress
Approval of a new limit is currently subject to other negotiating factors being discussed in Congress. Democrats and Republicans are still in the midst of negotiating a bipartisan $1 trillion package to modernize the nation’s infrastructure.
The infrastructure plan negotiations coincide with the Democrats’ proposal to release a $3.5 trillion budget resolution to fund the Biden-Harris administration’s proposed programs regarding early childhood care, medicare expansion and subsidizing the use and development of renewable energy.
While willing to compromise on the infrastructure plan, Republicans appear unwilling to compromise on the Democrats’ proposed budget extension. Expanding the debt limit or extending its exclusion will depend largely on how negotiations with Democrats progress on these other two bills.
Senate Minority Leader Mitch McConnell said on July 21 that he doubted GOP members would vote in favor of raising the debt limit.
On the Democratic side, it is still unclear whether they will include the debt limit extension in the budget resolution they plan to pass through the reconciliation procedure where Vice President Kamala Harris could tip the balance in favor in the event of a tie vote in the Senate.
Economist, writer and liberal. With a focus on finance, the war on drugs, history, and geopolitics // Economista, escritor y liberal. Con enfoque en finanzas, guerra contra las drogas, historia y geopolítica