Treasury unsure of how long it can stave off default without debt limit hike

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The U.S. hit its debt limit — currently $31.4 trillion — in January 2023, triggering a high-stakes and potentially disastrous political fight.

The Treasury Department said Wednesday that it is unable to predict how long it could stave off a default on the national debt if the federal debt limit isn’t suspended or increased this summer because of the COVID-19 recession.

In a Wednesday statement, the department said that “substantial COVID-related uncertainty” makes it “very difficult” to project how long Treasury can take what it calls “extraordinary measures” to pay the federal government’s bills without borrowing more money.

A 2019 budget deal suspended the legal limit on how much debt the federal government can hold until July 31. In previous years when the White House and Congress failed to reach a deal to raise the debt limit, Treasury was able to prevent a default by shuffling certain payments and obligations until the limit was raised again.

But Treasury said Wednesday that the unprecedented economic shock and federal response to the COVID-19 pandemic has made it near impossible to know how long extraordinary measures can prevent an economic calamity.

“Treasury is evaluating a range of potential scenarios, including some in which extraordinary measures could be exhausted much more quickly than in prior debt limit episodes,” the department said Wednesday.

The federal debt limit is a largely political tool imposed decades ago to force lawmakers to reconcile with the rising national debt. Economists and analysts across the ideological spectrum say that allowing the U.S. to default on its debt would likely cause a collapse of the global financial system, creating incredibly high stakes for debate over the limit.

The purchase and sale of U.S. debt through Treasury bonds and notes underpins much of the global financial system on the premise that the country will never be unable to pay what it owes, even if decades later. For this reason, U.S. debt is considered almost as safe as cash.

“We’ve always paid our bills, and it simply must happen that Congress raises the debt ceiling in time to allow that to happen,” Federal Reserve Chairman Jerome Powell told lawmakers in July 2019 during the height of the last battle over the debt limit.

The consequences of inaction “would be highly unpredictable,” Powell added, warning that “no one should assume that the Fed or any other agency can be relied upon to shield our economy from the short-, medium- and long-term negative consequences of such an act.”

While Congress is unlikely to allow the U.S. to default, Republicans are expected to call for spending cuts as a condition for raising the debt limit. Senate Republicans last month amended their rules to oppose raising the debt limit without cutting spending, but the standards are nonbinding.

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