Yellen warns Congress must pass debt limit hike by June 1 or risk default

Treasury Secretary Janet Yellen warned Congress on Monday that the U.S. could be unable to pay its bills as early as June 1 if lawmakers do not raise the federal debt limit.

Ms. Yellen informed House Speaker Kevin McCarthy and other congressional leaders in a letter that incoming tax revenue has been lower than expected, moving up the date by which lawmakers need to act or risk default.

“Our best estimate is that we will be unable to continue to satisfy all of the government’s obligations by early June, and potentially as early as June 1,” wrote Mrs. Yellen.

Since January, the Treasury Department has undertaken “extraordinary measures” to stave off default after the government hit its $31.4 trillion borrowing capacity. Those emergency tactics only give the government enough room to cover day-to-day expenses.

“Given the current projections, it is imperative that Congress act as soon as possible to increase or suspend the debt limit in a way that provides longer-term certainty that the government will continue to make its payments,” wrote Ms. Yellen.

The announcement puts both President Biden and Mr. McCarthy, California Republican, in a high-stakes game of chicken.

House Republicans have long demanded spending cuts in exchange for lifting the debt ceiling, and approved legislation last week to achieve that goal. Mr. Biden has refused to negotiate, saying both Democrats and Republicans have contributed to the national debt.

With time running out, it’s not clear whether Mr. Biden’s position will hold. The House-passed legislation would raise the debt ceiling by $1.5 trillion until May 2024 in exchange for $4.8 trillion in spending cuts.

Apart from raising the debt limit, the GOP bill would cut federal spending by $130 billion for the upcoming fiscal year and limit budget growth to 1% annually over the next decade.

The legislation also rescinds at least $90.5 billion in unspent pandemic relief, imposes new work requirements on welfare, cancels Mr. Biden’s student loan forgiveness program, and scraps $200 billion in green-energy tax credits. 

“If you look at this package, it represents the most common sense, straightforward approach to addressing the spending problem that got us here as we confront the debt ceiling,” said House Majority Leader Steve Scalise, Louisiana Republican.

The U.S. can’t legally default on its debt, but a failure by Congress to raise the cap on how much the federal government can borrow could spark a funding crisis for major programs.

Many Republican and Democratic lawmakers agree that the Constitution requires the federal government to honor its debt. That means even if Congress and the White House can’t agree on raising the debt ceiling, incoming tax revenue will be used to pay the roughly $500 billion in annual interest owed to the nation’s creditors.

But the government would only be able to spend what it takes in from taxes, which means it would stop paying — or default — on some of its obligations.