Treasury Implements 'Extraordinary Measures' With Debt Default Looming as Soon as June

The federal government is expecting to run up against its borrowing limit as soon as June, Treasury Department Secretary Janet Yellen told Congress on Friday, kicking off a legislative fight that could result in significant disruptions to government operations and the U.S. economy. 

Treasury will reach its $31.3 trillion debt ceiling Jan. 19, but the department will implement the “extraordinary measures” it typically takes to buy more time until it must default on the government’s obligations. House Republicans have promised a battle over the need to increase the limit, vowing to only agree to such a measure if it is accompanied by various mechanisms to reduce federal spending. 

Congress last agreed to increase its borrowing limit in late 2021, when it did so by $2.5 billion along party lines. Republicans unanimously rejected the measure, but allowed for it to pass with a Democrat-only majority in the Senate in a previously approved, bipartisan bill to allow for a one-time avoidance of normal filibuster rules.

In a letter to congressional leadership on Friday, Yellen implored lawmakers to avoid the “irreparable harm to the U.S. economy” that would result from a failure to address the debt ceiling. 

"Increasing or suspending the debt limit does not authorize new spending commitments or cost taxpayers money," Yellen said. "It simply allows the government to finance existing legal obligations that Congresses and presidents of both parties have made in the past."

The path toward an increase or suspension will likely prove difficult, as House Speaker Kevin McCarthy—as part of his efforts to shore up support for his new post—has promised to only take up such a vote if it is coupled with spending reductions. President Biden and congressional Democrats have said the debt ceiling should not be leveraged for negotiations over any other issue. 

There is no blueprint for how the government would operate if it reached and broke through its debt ceiling, though it is clear agencies would not be able to carry out their normal operations. Because typical spending outpaces the revenue the Treasury Department brings in on a given day, the federal government would only be able to pay 60% of its bills in a given month of a default scenario, according to a Bipartisan Policy Center estimate. 

Analysts and Treasury officials have sketched out two possible outcomes during a default: the government would either delay payments until it collected enough revenue to cover them, or prioritize some payments while allowing others to go unpaid. In either scenario, agency payments to beneficiaries, states, grantees, contractors and, potentially, their own employees, could be disrupted. Some federal workers could be furloughed or asked to continue working on the promise of back pay in the future.

As is typical, Treasury’s extraordinary measures will first suspend new investments into various federal retiree funds, as well as reinvestment into the Thrift Savings Plan's government securities (G) fund. All of the accounts will be made whole after the debt limit impasse ends. Yellen said it is impossible to know when her department will exhaust its ability to use those efforts to stay within its borrowing limit, but said it is unlikely to occur before early June. 

Many House Republican demands are dead on arrival in the Democratic-controlled Senate, and funding bills and debt ceiling increases have in recent years come about after bipartisan negotiations in the upper chamber. Some moderate Republicans, such as Rep. Brian Fitzpatrick, R-Pa., who played a key role in negotiating with conservatives initially opposed to McCarthy’s speakership, have said they can join with Democrats in forcing votes on the House floor that conservatives—or even leadership—oppose. That process can be time consuming, however, making it a difficult proposition when facing such a tight timeline. 

In a joint statement, Senate Majority Leader Chuck Schumer, D-N.Y., and Hakeem Jeffries, D-N.Y., noted Republicans spearheaded efforts to successfully raise the debt ceiling when they controlled government. They added even nearing a default could have significant impacts, as it did in 2011, and called for a quick resolution this time around.

“Democrats want to move quickly to pass legislation addressing the debt limit so there is no chance of risking a catastrophic default,” Schumer and Jeffries said. “Republican leaders must do the right thing to protect Social Security, the economy and our country.”

This story has been updated with additional comment.