Janet Yellen, the outgoing U.S. Treasury Secretary, warned Congress in a letter on Friday, January 17th, that the federal government will reach its statutory borrowing limit on Tuesday, January 21st, and will begin taking “extraordinary measures” to avoid breaching the limit and triggering a potential catastrophic default.
The letter was issued just three days before the Biden administration is set to transfer control of the U.S. government to President-elect Donald Trump and his team.
Yellen stated in the letter, “The duration for which extraordinary measures may be maintained is subject to considerable uncertainty, as it is challenging to predict with precision the cash flows of the U.S. government in the coming months.”
She mentioned that the Treasury will pause investments in government retirement funds and disability funds since these funds do not require immediate disbursement of benefits.
Yellen had previously indicated at the end of December that the budget agreement reached by Congress at the last minute did not include provisions for extending or permanently repealing the debt ceiling, but there could be a scenario of reaching the debt ceiling between January 14th and 23rd.
Under the 2023 budget agreement, Congress had suspended the debt ceiling until January 1, 2025. Although the Treasury can cover bills for a few more months, Congress must address the debt ceiling issue at the beginning of 2025.
The Treasury has taken so-called “extraordinary measures” in the past, such as accounting maneuvers, to keep the government running. However, once these measures are exhausted, the government faces the risk of default unless lawmakers and the president agree to lift the borrowing limits on the U.S. government, as a default on U.S. debt could have severe economic consequences.
Yellen wrote in the letter, “I urge Congress to act promptly to preserve America’s reputation and credit.”
The debt ceiling is the limit set by Congress for the U.S. government’s borrowing. Since government spending exceeds tax revenues, lawmakers need to regularly address this issue. It is a challenging political task as many members of Congress are reluctant to vote in favor of increasing debt.
The history of setting the debt ceiling in the U.S. can be traced back to 1917 when Congress granted the Treasury greater borrowing flexibility to fund America’s participation in World War I, but with limitations.
In 1939, Congress approved the first-ever total debt limit in modern history, set at $45 billion, and since then, due to spending surpassing revenues, it has been raised 103 times. As of October, federal debt accounted for 98% of the U.S. GDP, compared to only 32% in October 2001.
Currently, the federal debt stands at around $36 trillion, significantly increasing during both Republican and Democratic administrations. After the outbreak of the COVID-19 pandemic, inflation rates soared, driving up government borrowing costs, with projected debt service expenses exceeding national security spending in 2025.
With Republicans set to have full control of the White House, the House, and the Senate, and planning to continue Trump’s 2017 tax cuts and other priorities, the challenge of tackling the massive federal debt issue remains daunting.
(This article references reports from the Associated Press and Reuters)