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Yellen: Debt limit action may be needed this summer

Some independent forecasts expected lawmakers to have until at least October to deal with borrowing cap

Treasury Secretary Janet L. Yellen says pandemic relief spending, economic outlook makes timing uncertain.
Treasury Secretary Janet L. Yellen says pandemic relief spending, economic outlook makes timing uncertain. (Tom Williams/CQ Roll Call file photo)

Congress and the White House might be forced to deal with the debt limit before the August recess.

Treasury Secretary Janet L. Yellen said Friday that the federal government could run out of borrowing room as early as this summer, contradicting some analysts who’ve said Treasury’s large cash balance could provide a cushion well into the fall.

In 2019, Congress suspended the debt ceiling through July 31, 2021. At that point, Treasury can employ so-called extraordinary measures to delay bumping up against the debt limit. Those actions, such as delaying the investment of federal employee retirement funds, often can provide a few extra months of wiggle room.

But Yellen told reporters that given the massive government response to the pandemic and uncertain economic outlook, it was possible those typical measures may not last much beyond the July 31 expiration date. 

“There are scenarios in which sometime during the summer … extraordinary measures would run out,” she said. 

Yellen’s comments add a little more specificity to those of another top Treasury official earlier this week. On Wednesday, Brian Smith, the deputy assistant secretary for federal finance, said in a statement that Treasury was “evaluating a range of potential scenarios, including some in which extraordinary measures could be exhausted much more quickly than in prior debt limit episodes.”

Independent forecasters were surprised on Wednesday when Smith announced Treasury’s latest borrowing estimates, which foresee a $450 billion cash balance at the end of July. Based on past debt limit suspension periods, ordinarily there could be expected to be more than $300 billion less cash on hand. 

In the 2019 law, Congress removed a provision from prior debt limit suspensions that said Treasury couldn’t build up an excess stockpile in anticipation of needing the money to avoid hitting the borrowing cap. But lawmakers left in language stipulating that Treasury could only pay for “necessary obligations” of the government from programs funded in prior laws, which to some implied that adding excess cash was still barred.

The Trump administration amassed a huge cash horde during 2020 to deal with government relief programs, however, hitting nearly $1.8 trillion last October. That’s since been cut roughly in half and is scheduled to dwindle further in the coming months.

Yellen’s comments Friday suggest Treasury may be concerned about burning through that cash more quickly than expected.

“It is exceptionally challenging this time to try to figure out just how long those measures are going to last, in part because of higher and more volatile spending and revenue numbers associated with the state of the economy and the pandemic,” she said.

If Congress doesn’t act on the debt ceiling, once Treasury can no longer stay under the borrowing cap through such extraordinary measures, it would have to start prioritizing which spending obligations to meet based on incoming cash flow. That could mean difficult decisions on a daily basis, such as whether to delay interest payments to bondholders or Social Security checks, until Congress lifts or suspends the debt limit.

Paul M. Krawzak contributed to this report.

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