U.S. Treasury Secretary Janet Yellen announced that the government will hit its statutory borrowing limit on Tuesday and will implement "extraordinary measures" to prevent exceeding the cap and risking a possible catastrophic default. Yellen stated in a letter to congressional leaders on Friday that these measures will commence on January 21. The exact duration of the measures is uncertain due to the complexities of predicting government payments and receipts in the coming months.
To stay under the $36.1 trillion debt ceiling, the Treasury will halt investments in two government employee benefit funds until March 14, aiming to restore borrowing capacity. Yellen emphasized the need for Congress to raise or suspend the debt limit to safeguard the credibility of the United States.
Former President Donald Trump had urged lawmakers to address the debt ceiling issue, highlighting the potential economic repercussions of a default. Trump's Treasury nominee, Scott Bessent, views the debt ceiling as a crucial bargaining tool in fiscal negotiations. The Treasury's use of extraordinary measures can postpone default for several months, contingent on tax revenue performance.
Failure to address the debt limit could lead to the Treasury defaulting on its obligations, with significant economic ramifications. The current debt ceiling was established by Congress to control government borrowing, a perennially contentious issue given the necessity for increased government spending relative to tax revenues.
The concept of the debt ceiling dates back to 1917, a response to the financial needs of World War I. Since 1939, Congress has repeatedly raised the borrowing cap to accommodate escalating spending exceeding tax revenue. As of October, publicly held debt represented 98% of U.S. GDP, significantly higher than 2001's 32%.