US Treasury could run out of liquidity by November if $ 22 trillion debt limit is not lifted, CBO warns

Top line

The US Treasury risks running out of liquidity as early as October if the debt limit is not lifted in the coming weeks, the Congressional Budget Office warned on Wednesday, giving urgency to a problem that appears to be at a standstill in Washington as Democrats and Republicans remain at a deadlock over the cost of President Joe Biden’s lofty infrastructure ambitions.

Highlights

In accordance with Bipartite finance law 2019, Congress faces an August 1 deadline to increase the current debt limit, which is the maximum amount of debt the Treasury can issue to the public and other federal agencies, or extend its suspension. in place.

Treasury should take “extraordinary measures” to fund government operations if no action is taken, CBO warned Wednesday, saying the department’s few options include cutting investments in federal pension funds, health benefits and disability funds for federal government employees and retirees.

However, even these measures would only help briefly, the CBO continued, estimating that the Treasury would likely be cash-strapped in the first quarter of the next fiscal year, which begins October 1 and most likely by October or November.

If the treasury runs out of cash, the CBO says the government would effectively be unable to meet its obligations, forcing it to delay payments, default on debt obligations, or both.

The report came hours after senses Chuck Schumer (DN.Y.) and Mitch McConnell (R-Ky.), Who lead their respective parties to the chamber, fought to raise the debt limit, McConnell saying that he can’t imagine “a single Republican” voting for it given increased government spending during the pandemic.

Schumer fired back in the Senate, claiming that McConnell’s statements on the debt limit are “shameless, cynical and utterly political,” and claiming that the current national debt, which stands at $ 28.5 trillion, is the “Trump debt” and “Covid debt”.

In addition to holding stand-alone votes to raise or suspend the debt limit (which would require some Republican support), Democrats could include a debt ceiling proposal in a budget reconciliation bill to pass guidelines. single party, although the fate of such a bill is uncertain and negotiations could last beyond September.

Crucial quote

“Unless legislation is enacted to increase or suspend the debt limit, the Treasury must take extraordinary steps to continue funding government activities after August 1,” the CBO warned in the report. “Even then, such measures will only be available for a limited time.”

Chief critic

“I can’t imagine that a single Republican in this environment we find ourselves in right now – this free on all taxes and spending – voting to raise the debt ceiling,” McConnell said. Told Punchbowl news in an interview on Wednesday. “I think the answer is they need to include it in the reconciliation bill,” he added, referring to a $ 3.5 trillion infrastructure package Democrats hope to pass. without the support of Republicans.

Large number

35 trillion dollars. This is how much the CBO expects the country’s debt to swell by the end of this year, before adjusting fiscal stimulus.

Key context

Amid inflationary concerns that have rocked the markets in recent months, the gap between government spending and revenue has widened. inflated to over $ 2.2 trillion in fiscal 2021, less than last year’s $ 2.7 trillion at this time, but far more than historic deficits of less than $ 1 trillion . A larger deficit usually means the government takes on more debt, which can ultimately limit the government’s willingness and ability to increase spending in order to curb economic downturns or fight pandemics. According to the Treasury, Congress has either increased, extended, or revised the definition of the debt limit 78 times since 1960, and it has never failed to act on the debt limit when necessary. Yet the Treasury had to temporarily implement “extraordinary measures” when Congress failed to respond quickly, including more recently in 2013, when the government suspended investments in pension funds and has taken unprecedented steps to restructure its debt

Further reading

U.S. National Debt Expected to Approach $ 89 Trillion by 2029 (Forbes)

National debt set to become bigger than the entire US economy, says CBO (Forbes)

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