US Treasury says government may default on debt as early as June

A letter from US Treasury Secretary Janet Yellen warns of potential ‘harm to business and consumer confidence’.

Janet Yellen speaks during a hearing
Treasury Secretary Janet Yellen listens during a House Committee on Financial Services hearing on April 6, 2022, in Washington, DC [File: Evan Vucci/AP Photo]

United States Treasury Secretary Janet Yellen has sent a letter to Republican House Speaker Kevin McCarthy warning him that the federal government could hit its spending limit by June 1 if Congress does not raise the debt ceiling.

In the letter published on Monday, Yellen said available data points to early June as the period when the government will no longer be able to cover its expenses should Congress fail to raise the limit before then.

“Given the current projections, it is imperative that Congress act as soon as possible to increase or suspend the debt limit in a way that provides longer-term certainty that the government will continue to make its payments,” the letter reads.

Though Yellen’s letter indicates the US could enter default as early as June 1, the treasury secretary also noted that it is “impossible to predict with certainty the exact date when Treasury will be unable to pay the government’s bills”.

Monday’s letter comes as US President Joe Biden reportedly called for a May 9 meeting with Democratic and Republican leaders to discuss spending and the debt limit.

Experts have warned that a possible default would have dire impacts on the US economy: It could cause the US’s credit rating to fall, leading to higher interest rates and a possible recession.

Raising the US spending limits is a largely routine procedure but one that has become increasingly contentious in recent years. To raise the debt ceiling this year, Republicans in Congress are pushing for steep cuts to social programmes in exchange for their support.

The Biden administration has called for an increase to the debt ceiling without conditions, stating that debates over various programmes can be hashed out during negotiations on the yearly budget.

His concerns were echoed by fellow Democrats in the aftermath of Yellen’s letter, who called for a “clean” debt limit increase without haggling or addendums.

“We have about a month until the U.S. defaults on paying its debt. Let’s be clear — this isn’t new spending,” Virginia Senator Mark Warner tweeted on Monday. “This is about paying bills we’ve already incurred. We cannot unleash economic catastrophe on the American people.”

Last week, the Republican-led House of Representatives passed a bill that agreed to raise the debt ceiling by $1.5 trillion in exchange for $4.5 trillion in spending cuts for programmes like healthcare for low-income communities, renewable energy and transportation.

The bill is considered dead on arrival in the Democrat-controlled US Senate, and Biden has stated that he would veto it. But its passage in the House is considered a victory for McCarthy, who has since called for Democrats to “do their job” to approve the bill and avoid a default.

“In our history, we have never defaulted on our debt or failed to pay our bills,” White House Press Secretary Karine Jean-Pierre said in a statement following the vote.

“President Biden will never force middle class and working families to bear the burden of tax cuts for the wealthiest, as this bill does. The President has made clear this bill has no chance of becoming law.”

On Monday, the Congressional Budget Office also stated that it saw an increased risk of the government running out of funds by early June due to tax receipts that were lower than expected.

Source: Al Jazeera and news agencies