Yellen’s announcement, which came in the form of a letter to the US Congress on Friday, pushes back the deadline for a potential default from an earlier estimate that the Treasury could run out of cash as soon as June 1.
“During the week of June 5, Treasury is scheduled to make an estimated $92 billion of payments and transfers,” which includes a nearly $36bn quarterly adjustment towards Social Security and Medicare trust funds, Yellen wrote in the letter.
“Therefore, our projected resources would be inadequate to satisfy all of these obligations,” she said.
The expanded deadline gives legislators more breathing room as they try to reach an agreement to increase the US spending limit.
Congress is tasked with increasing the nation’s debt ceiling, and Republican legislators have used their majority in the US House of Representatives as leverage to demand cuts to social programmes in exchange for a ceiling increase as a default looms on the horizon.
Where do things stand?
Over the last several weeks, Republican House Majority Leader Kevin McCarthy has been in talks with President Joe Biden’s administration as they try to reach an arrangement and avoid default, which experts say could have devastating effects on the US and global economy.
Speaking earlier on Friday, McCarthy said that negotiators were working to “finish the job” but did not know if a deal would be reached within 24 hours.
The two sides are looking at an agreement that would raise the debt ceiling for two years — until after the next presidential election — cutting spending for 2024 and imposing a 1 percent cap on spending growth for 2025.
It is not clear if the relaxed deadline will give legislators space to iron out the final details or if conservatives will dig in their heels and use the extra time to push for greater concessions and spending cuts. Most lawmakers have left for the Memorial Day weekend but have been warned they will need to report back to Washington, DC to vote on a deal in the case there is one.
According to the Treasury Department, the debt ceiling has been raised 78 times since 1960 — 49 times under Republican presidents and 29 under Democratic ones.
What does each party want?
Republicans have pushed for more restrictive requirements on benefits such as food assistance and healthcare for low-income recipients — whom the party wants to have jobs — saying the country must decrease its spending levels.
Democrats are resisting the new work requirements for benefit programmes and have been quick to point out that, during former President Donald Trump’s administration, Republicans seemed to show little concern about raising spending limits.
On Thursday, news outlets reported that McCarthy and Biden were nearing a deal that would reportedly include increased military spending, claw back unused COVID-19 relief funds currently set aside for things like disaster relief and vaccine research, and cut funding for the Internal Revenue Service (IRS).
Most importantly, the deal would reportedly include a cap on non-military discretionary spending on things such as housing, education, road safety and other federal programmes.
While a spending cap would likely serve as a de facto cut to social safety net programmes, given growing inflation, such a deal would likely be more palatable to Democrats than the steep cuts Republicans had previously proposed.
What happens if the US fails to meet the deadline?
The risks of default are also considerable, with Yellen previously warning that default would be an “economic and financial catastrophe” that would “raise the cost of borrowing into perpetuity”.
Some ratings agencies have warned they may downgrade US credit, which would push up borrowing costs and undercut the country’s global standing.
When Republicans in 2011 also pushed for spending cuts in exchange for a debt ceiling increase — and triggered a temporary suspension of numerous government services — the Government Accountability Office found the delayed ceiling increase cost the US about $1.3bn in heightened borrowing costs in a single year.
A recent analysis by Brookings, a US think tank, found that lower borrowing rates, which the government currently enjoys, will save it about $50bn next year and more than $750bn over the next 10 years. The analysis states that if “a portion of this advantage were lost by allowing the debt limit to bind, the cost to the taxpayer could be significant”.
Another report by Moody’s, an economic analytics group, likewise found that failure to reach a deal before the deadline could result in a 1.6 percent increase in unemployment, even if the ceiling were raised shortly after.
The question of what effect a default would have on government services, and what payments the Treasury would prioritise, also remains an open question.
In 2011, a deal was reached just two days before the Treasury estimated it would run out of money to meet its financial obligations.
The U.S. has kept its financial commitments since 1789 by paying its bills on time. Congress has prevented default 78 times. It’s essential they do so again. pic.twitter.com/azPjhFdUry
— Secretary Janet Yellen (@SecYellen) May 22, 2023
At the time, the Treasury planned to prioritise interest and principal payments, with possible delays on other obligations such as retirement benefits, healthcare and military salaries.
The Biden administration has not made clear which payments it would prioritise in the event of default.
However, recent reporting by National Public Radio in the US found that $12bn in veterans benefits and $47bn for Medicare providers are due on June 1, $25bn in social security benefits are due on June 2, and $4bn in federal salaries is due on June 9.
If a default were to occur, those payments could go unmet.
“If Congress fails to increase the debt limit, it would cause severe hardship to American families, harm our global leadership position, and raise questions about our ability to defend our national security interests,” Yellen’s letter reads. “I continue to urge Congress to protect the full faith and credit of the United States by acting as soon as possible.”