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Paschal Donohoe, Ireland’s finance minister, left, and Janet Yellen, U.S. Treasury secretary, arrive at a Eurogroup meeting of European Union (EU) finance ministers in Brussels on July 12, 2021.
Paschal Donohoe, Ireland’s finance minister, left, and Janet Yellen, U.S. Treasury secretary, arrive at a Eurogroup meeting of European Union (EU) finance ministers in Brussels on July 12, 2021. (Valeria Mongelli/Bloomberg)

WASHINGTON — Treasury Secretary Janet Yellen on Tuesday told Congress that the U.S. will run out of flexibility to avoid breaching the debt limit on Oct. 18, setting a new deadline for lawmakers to avoid a catastrophic default on its payment obligations.

"It is uncertain whether we could continue to meet all the nation's commitments after that date," Yellen wrote in the letter to House Speaker Nancy Pelosi, D-Calif.

Yellen's letter came less than 24 hours after Senate Republicans blocked a bill that would suspend the debt ceiling and prevent a government shutdown on Friday. Senate Republicans have said they would support a stand-alone measure to prevent the shutdown but they largely have opposed efforts by Democrats to suspend the debt ceiling.

The U.S. government runs a large budget deficit, spending far more than it brings in through tax revenue. To address this imbalance, the government borrows money by issuing debt. But it can only issue debt up to a limit set by Congress. That limit is repeatedly raised or suspended, and lawmakers are now up against another cap.

If Congress doesn't raise the limit, the Treasury Department will not have the capability to pay all of its bills. Yellen's new letter lays out that this crunch will really tighten after Oct. 18. She called on Congress to act as swiftly as possible, an overture she has tried for weeks without much success.

Yellen's letter stressed that even narrowly avoiding a debt default could hurt taxpayers. The uncertainty around America's ability to meet its payment obligations could make investors more nervous about buying U.S. debt, which would drive up borrowing costs for taxpayers.

"We know from previous debt limit impasses that waiting until the last minute can cause serious harm to business and consumer confidence, raise borrowing costs for taxpayers, and negatively impact the credit rating of the United States for years to come," she wrote in the letter. "Failure to act promptly could also result in substantial disruptions to financial markets, as heightened uncertainty can exacerbate volatility and erode investor confidence."

Economists have said that the U.S. economy would be plunged into an economic recession if the debt ceiling was breached. A report by Moody's Analytics found that a default could cost the economy roughly 6 million jobs and wipe out as much as $15 trillion in household wealth.

Congressional Democrats are expected to try to pass the measure without GOP votes after Republicans defeated the attempt to do so on a bipartisan basis. Budget experts have said the process to pass the debt ceiling hike could take Democratic lawmakers as long as two weeks, and comes at a time when Democrats are simultaneously trying to advance Biden's sprawling economic agenda. That should give them enough time to get the debt ceiling raised, but very little measure for error.

While Yellen's letter highlighted the date of Oct. 18, she stressed that fluctuations in the cash flow of the federal government — exacerbated by the pandemic — makes precise predictions difficult.

"Estimates regarding how long our remaining extraordinary measures and cash may last can unpredictably shift forward or backward," she wrote. "This uncertainty underscores the critical importance of not waiting to raise or suspend the debt limit."

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