Treasury Secretary Janet Yellen is setting off alarm bells over a looming brawl about the nation’s borrowing limit that could spark a global economic crisis if Congress fails to take action.
Yellen’s warning, delivered to congressional leaders on Wednesday, that the country could default on its debt as soon as next month is casting new urgency on the behind-the-scenes discussions about how to raise the debt ceiling.
No clear end game is in sight.
Democrats could need 10 GOP votes to raise the debt ceiling if Republicans filibuster the measure. Democrats have only 50 votes in the Senate, and GOP leaders have indicated they will not help raise the borrowing limit.
Including a debt ceiling hike in the budget reconciliation measure that Democrats are now drafting would be one way around the GOP. The budget rules prevent a GOP filibuster.
Democratic leaders have signaled they don’t want the debt ceiling to be a part of that package.
“We won’t be putting it in reconciliation,” Speaker Nancy Pelosi (D-Calif.) told reporters on Wednesday.
It’s also unclear whether the package will be finished in time to meet the debt deadline. Yellen on Wednesday said the limit would be breached in October.
“The time for Congress to act is now to make sure the U.S. does not come close to defaulting on some of its obligations,” said Rachel Snyderman, associate director at the Bipartisan Policy Center, a nonpartisan think tank that closely tracks the debt limit. “But what’s concerning right now is that there are so many important priorities at play,” she continued.
GOP lawmakers helped suspend the debt ceiling under former President Trump, who added to the debt by signing a huge tax cut bill and several major spending bills.
But the GOP has vowed not to provide votes for President Biden as Republicans fume over Democrats’ plan to pass the $3.5 trillion spending package under budget reconciliation rules.
The GOP wants to make Democrats own both the spending measures and the debt vote, with the view it will help Republicans retake majorities in the House and Senate in next year’s midterm elections.
Senate Minority Leader Mitch McConnell (R-Ky.) jabbed last month as the fight ramped up that if Democrats were going to greenlight the spending, shouldn’t they “be proud to own all the debt it requires?” And 46 GOP senators signed a letter vowing that they won’t support raising the debt ceiling, leaving Democrats short of the votes.
Doug Andres, a spokesman for McConnell, said on Wednesday that flirting with a debt default would be a “crisis” of Democrats’ “own making.”
“Democrats control Washington now. They can raise the debt limit on their own,” he said.
Senate Majority Leader Charles Schumer (D-N.Y.) blasted Republicans on Wednesday during a conference call with reporters, saying that opposing a debt hike would be a “horrible” and “despicable act.”
“It would be just the height of irresponsibility for Republicans to play games to take the debt limit hostage,” he said.
Allowing the nation to default would be unthinkable, but it’s not entirely clear how Biden and Democrats will deal with the issue.
The increasingly partisan fight comes as Congress deals with a full plate of legislative issues, including funding the government by month’s end and the sweeping $3.5 trillion spending package.
Yellen tried to drive home the stakes in a letter to lawmakers warning that amid a pandemic, which rocked the global economy, “it would be particularly irresponsible to put the full faith and credit of the United States at risk.”
The debt ceiling kicked back in on Aug. 1 after a suspension included in a 2019 budget deal expired without action from Congress. The Treasury Department has been using “extraordinary measures” to keep the U.S. solvent since then, but they will run out next month, Yellen warned Wednesday.
“Once all available measures and cash on hand are fully exhausted, the United States of America would be unable to meet its obligations for the first time in our history,” Yellen said.
“Given this uncertainty, the Treasury Department is not able to provide a specific estimate of how long the extraordinary measures will last. However, based on our best and most recent information, the most likely outcome is that cash and extraordinary measures will be exhausted during the month of October,” she continued.
The federal debt limit is a legal cap on how much debt the U.S. can take on to pay obligations already approved by the president and Congress for several years. Raising the ceiling does not erase or create any new debt but instead gives the federal government more room to pay off its bills.
Wall Street and the banking system have grown accustomed to high-stakes fights over the debt ceiling in Washington.
Credit ratings firm Standard & Poor’s downgraded the county’s credit rating during a 2011 showdown over the debt limit, and the 2013 debt limit fight likely added tens of millions of dollars to the national debt through higher borrowing costs, according to a Government Accountability Office report.
But until the deadline gets much closer, market reaction seems unlikely to put much pressure on lawmakers and the administration.
Still, Synderman noted that yields on short-term Treasury bonds have risen in recent weeks as investors become increasingly concerned about the risk of a default, particularly as the impact of the pandemic limits the ability to nail down when it may happen.
The general dynamics of the fight have been brewing for months: Senate Republicans previously got nonbinding language into their conference rules recommending that any hike in the debt ceiling is contracted by spending reforms or cuts.
And Democrats have warned that they won’t negotiate on the debt ceiling, noting that Republicans had helped put up the votes under Trump.
“Now they want to risk a recession by refusing to pay debts largely accrued before Biden took office. We will not negotiate with Republicans to convince them to do the job they were elected to do,” Sen. Elizabeth Warren (D-Mass.) tweeted on Wednesday.
Another option for raising the debt ceiling would be to include it in a short-term government funding bill Congress needs to pass by the end of the month to avert a government shutdown. But that could risk a shutdown if Republicans balk too close to the deadline.
Pelosi declined to say how Democrats would raise the debt ceiling but urged Republicans to act in a “responsible way.”
“We’ll have several options. We’ll make them well known, too, as we narrow and as we go forward. But … it has to happen. Again, three times during the Trump administration, we all cooperate to get past this, and, hopefully, they will be responsible,” she said.
Schumer similarly demurred, telling reporters that Democrats have a “number of different ways” they could address the debt ceiling.
“Stay tuned,” he added.