The United States has come a little closer to a potential default on its public debt, thus advancing towards the moment when the country will no longer be able to meet all its obligations, warned this Monday, May 1, the American Secretary at the Treasury Janet Yellen. In a letter addressed to the Republican President of the House of Representatives, Kevin McCarthy, and made public by the Treasury, Janet Yellen indeed estimated that the debt wall could be reached “as of June 1”. “Our best estimate is that we will no longer be able to meet all government obligations by early June, and potentially as early as June 1,” she wrote to the Republican leader.
What is the debt limit?
The debt ceiling is the limit on the amount of money the US government can borrow to pay for services, such as Social Security, Medicare, and the military. Each year, the government raises revenue from taxes and other flows, such as customs duties, but ultimately spends more than it receives. This leaves the government with a deficit, which has ranged from $400 billion to $3 billion in recent years. The remaining deficit at the end of the year is finally added to the country’s total debt.
To borrow money, the US Treasury issues securities, such as US government bonds, which it will eventually repay with interest. Once the US government reaches its debt limit, the Treasury can no longer issue securities, which essentially stops a key flow of money to the federal government. Congress is responsible for setting the debt limit, which currently stands at $31.4 billion. The debt ceiling has been raised 78 times since 1960, under Democratic and Republican presidents. Sometimes it was briefly suspended and then reinstated at a higher limit, essentially a retroactive increase in the debt ceiling.
What are the consequences if the debt ceiling is not raised?
This does not mean a default as of next month, but the United States, which until now had been able to avoid closing services by playing on the various accounting lines, would find itself this time in a much more precarious economic situation. In concrete terms, the Treasury would be forced to choose between its various constrained expenditures, which could force it to severely limit some, in particular those relating to health or retirement benefits, in order to be able to continue to fulfill its obligations relating to its future maturities related to its debt.
“It is impossible to predict with certainty the exact date when the Treasury will no longer be able to pay government bills and I will continue to update Congress in the coming weeks as information becomes available,” added Janet Yellen. While the subject had been the subject of a “slow motion political confrontation in Washington”, his warning “gives urgency to the calendar”, notes the American radio NPR.
In a statement, the Congressional Budget Service (CBO) confirmed the Treasury’s estimates, saying that “to the extent that the income reporting campaign has been weaker than initially anticipated, we now estimate that there has a significantly higher risk that the Treasury will no longer have the necessary funds from the beginning of June”.
How can this impasse be explained?
This year, the Republicans, who have had a slight majority in the House since the beginning of 2022, refuse to grant what they consider to be a blank check in favor of the Biden administration and instead want an increase in this cap is coupled with a drastic cut in federal spending. However, the federal government reached its ceiling of 31,000 billion dollars in mid-January, forcing the Treasury to take a first series of measures, above all accounting, in order to remain at the level reached.
Last Wednesday, the House of Representatives voted on a text proposed by Kevin McCarthy providing for a $4.5 trillion cut in federal spending over the next ten years in exchange for a $1.5 trillion ceiling increase, or a review clause to March 31, 2024, which would therefore make the debt one of the main themes of the presidential campaign in view of the elections of November of the same year. For Republicans, it’s a way of pressuring Democrats to accept spending cuts. They did it successfully in 2011, when Democrats agreed to cut spending 72 hours before the government defaulted.
How will things evolve in the near future?
On the side of the White House, Joe Biden has repeated several times that the raising of the ceiling must be carried out unconditionally, believing that the debt was the result of the policies carried out in the past by all the administrations, from both parties. . In a press release, the presidency announced that Joe Biden called Kevin McCarthy on Monday to invite him to a meeting on Tuesday, May 9, in the presence of the main Democratic and Republican officials in Congress. The text proposed by the Republicans is unlikely to be voted on by the Senate, controlled by the Democrats by a slight majority.
“It’s time to put partisan interests aside and do what’s right and necessary for the American people and avoid the first government default that would crash markets, raise costs for families and challenge their lives. savings for retirement,” Democratic congressional leaders Chuck Schumer (Senate) and Hakeem Jeffries (House) said Monday in a joint statement. The two parties must, however, reach an agreement quickly: the current parliamentary session provides for only 12 days of debate on Capitol Hill between now and June 1. A default “would cause an economic and financial catastrophe”, warned Janet Yellen on April 25.
