Steven Mnuchin, the US Treasury secretary, has told Congress that the government might run out of money to pay its bills in early September unless lawmakers raise America’s $22tn borrowing limit. The warning sets the stage for a high-stakes political showdown over fiscal policy in the coming weeks.
Mr Mnuchin on Friday sent a short letter to Nancy Pelosi, the Democratic speaker of the House of Representatives, laying out the need for action on the so-called debt ceiling before Congress takes its August recess. An agreement would also have to include the White House and Republican Senate leader Mitch McConnell.
“We model various scenarios for our cash projections. Based on updated projections, there is a scenario in which we run out of cash in early September, before Congress reconvenes. As such, I request that Congress increase the debt ceiling before Congress leaves for summer recess,” Mr Mnuchin wrote.
Jay Powell, the Federal Reserve chairman said the fate of the debt ceiling was one of the main sources of uncertainty in the global economy, along with trade tensions and Brexit, which is driving the US central bank to consider a cut in interest rates as early as this month.
The rush to forge a deal to lift the debt ceiling, allowing the US Treasury to borrow to cover its obligations, followed a report by the Bipartisan Policy Center, a Washington think-tank, that highlighted the risk of an earlier-than-expected breach of the limit. Federal revenues have been weaker than expected due to sluggish corporate tax receipts following the Trump administration’s 2017 tax reform.
“The latest data reveal a serious risk that the ‘X Date’ [when the Treasury would run out of cash] could fall in early September, particularly if federal revenues underperform,” wrote Shai Akabas, the BPC’s director of economic policy.
“Even though our projection continues to show that the most likely timing of the ‘X Date’ remains early October, uncertainty is high, and it would be reckless for policymakers to run the risk of default by failing to deal with the debt limit in advance of the August recess.”
Ms Pelosi this week said she was keen to secure an agreement on the debt limit within the next month, but budget compromises with Republicans on Capitol Hill and the Trump administration have been hard to reach. There are divisions over spending levels and other issues such as funding for a border wall with Mexico and abortion.
In addition to a possible debt default, the US would face a government shutdown in early October if no budget agreement is reached. Although budget stand-offs have resulted in federal shutdowns under both the Trump and Obama presidencies, fears about the economic consequences of a debt default have always led to eleventh-hour solutions on the borrowing limit.
“We are not predicting default,” wrote Chris Krueger, an analyst at Cowen’s Washington Research Group. “Our base case is that Washington will follow the old axiom: when at the edge of a cliff, build more land.”