Federal Government Officially Reaches Debt Limit, Urges ‘Extraordinary Measures’ To Prevent Default – Here’s What That Means

Federal Government Officially Reaches Debt Limit, Urges ‘Extraordinary Measures’ To Prevent Default – Here’s What That Means

Top line

The federal government reached its $31.4 trillion borrowing limit on Thursday, Treasury Secretary Janet Yellen said as she began “extraordinary measures” to stave off a default, as Republicans and the White House remain deadlocked on a deal to raise the debt limit. .

Key facts

“Extraordinary measures” refer to accounting tricks the Treasury Department can use to prevent the government from defaulting on its debts, including transferring money from one agency to another when payments are due and making some new investments suspend.

Yellen said in a letter to House Speaker Kevin McCarthy (R-Calif.) Thursday that she will suspend new investments in the Civil Service Retirement and Disability Fund and the Postal Service Retiree Health Benefit Fund — measures that would have prevented the government add to it. his debts.

The extraordinary measures also have a deadline, however: Yellen estimated that the Treasury will stop accounting tricks and reach its “X-date” by June 5, depending on how much revenue the government collects in spring tax returns .

Once the impasse ends, the retirement funds will be “rounded off,” meaning federal employees who have invested in them will not be affected.

Important quote

“The length of time that extraordinary measures may last is subject to considerable uncertainty,” Yellen wrote Thursday. “I respectfully urge Congress to act promptly to protect the entire faith and credit of the United States.”

Background Keys

To prevent a default, the Republican-controlled House and the Democratic-controlled Senate will have to agree on a bill that will raise the debt ceiling and allow the government to borrow before the Treasury reaches its “X-date.” Fears about the debt limit grew earlier this month, when far-right Republicans in the House proved they are willing to take extreme measures to convince leadership to give in to their demands. McCarthy was elected after 15 rounds of voting – the first time in 163 years that the election has gone beyond 11 rounds – and only gave in to major concessions demanded by a group of 20 right-wing legislators, some of whom which affects the debt ceiling negotiations. Among them is a provision that requires Congress to hold a single vote on raising the borrowing limit, rather than passing it as part of a budget resolution. The agreement also included a promise from McCarthy that Congress would not agree to raise the debt ceiling without significant spending cuts. It’s unclear exactly what those cuts would entail, but some Republicans have raised the age for Medicare and Social Security eligibility in an effort to reduce the federal deficit.

Tangent

The federal government has never defaulted on its debt, and Congress has raised the borrowing limit 60 times since 1978 to avoid the situation, which would have been disastrous for financial markets and adversely affected the economy through confidence in the US which is usually safe to erode. government debt. A default would also leave the government—which has run annual deficits for years and relies on borrowing to stay open—incapable of paying many of its bills, putting a range of federal programs at risk.

Surprising fact

Yellen most recently deployed “extraordinary measures” in 2021 to stave off a default, before Congress raised the $2.5 trillion cap in December of that year. But getting too close to the “X-Date” has consequences. In 2011, Republicans, who had just regained control of the House in January of that year, demanded deficit reductions from former President Barack Obama’s administration in exchange for raising the debt ceiling. Congress reached a deal two days before the Treasury estimated it would reach its borrowing limit, but the first-ever downgrade of the US credit rating led to default fears, sending stock prices tumbling.

Contra

The White House has said it will refuse to negotiate on raising the debt ceiling, and has begun courting moderate Republicans who might join Democrats in voting to raise the cap without any conditions, Politics reported.

Further Reading

Debt Limit Interpretation: How Upcoming Negotiations Could Play Out in Congress (Forbes)

US Could Run Out Of Cash By Early June If Debt Limit Is Not Raised, Yellen Warns (Forbes)

Debt Limit Show And Government Shutdown Is The Biggest Risk In A Decade – Here’s What To Expect (Forbes)

Leave a Reply

Your email address will not be published. Required fields are marked *