Leer en Español
The United States could be about to run out of room to incur more federal debt this year unless Congress decides to suspend the limit in place, Treasury Secretary Janet Yellen has said.
In 2019, Congress temporarily suspended the debt ceiling that the federal government could take on, a suspension that would last until July 31, 2021. At present, if the federal limit for indebtedness is not suspended or the ceiling is raised, the Treasury Department will not be able to continue issuing government bonds to raise money and continue covering the State’s operating expenses, so it will have to apply emergency measures to respond for these obligations, such as making cuts in public spending.
In her hearing before the Senate, Yellen insisted that the pandemic has made it difficult to quantify the size of the government’s payments, so according to the Secretary it is not clear when the Treasury will be able to stop resorting to this indebtedness.
If there is no congressional approval to increase the debt limit or temporarily eliminate it, it could cause cash flow problems for the Treasury Department, which could cause the Federal Government to fall short of its obligations and even begin to default on its debt payments.
“Failing to increase the debt limit would have absolutely catastrophic economic consequences,” Yellen warned in the midst of her Senate hearing. The Treasury secretary also warned about the risks of not extending the debt ceiling as “it would precipitate a financial crisis. It would threaten the jobs and savings of Americans at a time when we’re still recovering from the Covid pandemic.”
During President Joe Biden’s stimulus plan negotiations, the Democratic Party decided not to include a debt ceiling increase in the package, however such an increase could be considered in the new infrastructure plan being negotiated between the White House and senators from both parties.
The White House sees room for more federal borrowing
The Treasury Department’s borrowing capacity will also depend to a large extent on the speed at which the IRS (the Internal Revenue Service) collects taxes, a collection that has been quite volatile during the pandemic, however, it increased its collection by 26% so far in 2021 due to rapid economic growth. Forecasts for the next few years estimate an increase in federal revenue in the future, giving the Treasury Department a cash cushion.
At present, the U.S. federal debt exceeds 100% of U.S. GDP and is projected to exceed 107% of GDP in 10 years. The Biden administration for its part estimates that the growth of the US economy over the next few years will make even the debt payment negative, which will mean that the government will enjoy surpluses for some time to come.
Despite the White House’s premonitions, the deficit climbed to $2.1 billion during the first 8 months of the fiscal year, which runs from October last year to September 2021. With the pandemic and three stimulus plans the U.S. economy saw the largest expansion of federal spending not previously seen since World War II.
The growing deficit will continue to be a point of contention in Congress and a thorn in the side of the Biden administration as it seeks to negotiate two other mega-plans, the American Jobs Plan and the American Families Plan.
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