If Congress fails to raise the debt ceiling, veterans will not receive disability payments : Veterans

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WASHINGTON—The Treasury Department could run out of room next month to keep paying the government’s bills on time unless Congress steps in to suspend or raise the federal borrowing limit, Secretary Janet Yellen said in a letter to congressional leaders Wednesday.

Time to raise or suspend the limit is running short against a backdrop of deep partisan disagreements over President Biden’s spending plans, complicating the path forward on Capitol Hill.

The Treasury has been using cash-conservation measures to keep paying the government’s obligations since Aug. 1, when the borrowing limit was reinstated after a two-year suspension. Ms. Yellen urged lawmakers to suspend or raise the limit, or debt ceiling, before the Treasury exhausts those emergency measures, which she said will likely run out during October.

“I respectfully urge Congress to protect the full faith and credit of the United States by acting as soon as possible,” she said.

Without the ability to issue new debt to raise cash, the government would begin to miss payments to bondholders, Social Security recipients, veterans and others, and default on its obligations. Such an event, which has never happened, could send financial markets into a tailspin.

In her letter Wednesday, Ms. Yellen said past debt-limit showdowns, including in 2011 and 2013, have shown that waiting too long to act “can cause serious harm to business and consumer confidence, raise short-term borrowing costs for taxpayers, and negatively impact the credit rating of the United States.”

“A delay that calls into question the federal government’s ability to meet all its obligations would likely cause irreparable damage to the U.S. economy and global financial markets,” she said.

Ms. Yellen last month declared a new debt issuance suspension period lasting through Sept. 30, suggesting that she expected the Treasury’s emergency measures to last at least until October. Wednesday’s letter is the first time she formally notified Congress when those measures might run out.

Republicans have vowed not to cooperate with Democrats’ efforts to suspend or raise the borrowing limit, calling on them to deal with the debt limit as part of a partisan budget reconciliation package that would require only 50 votes, with Vice President Kamala Harris breaking any tie, to advance in the evenly divided Senate.

Administration officials and Democratic leaders have insisted, however, that Republicans should also be part of any agreement to increase the debt ceiling. Lifting the ceiling doesn’t authorize new spending but allows the Treasury to borrow to cover spending that Congress—both Democrats and Republicans—has already authorized.

Congress will also need to pass a short-term extension of government funding, known as a continuing resolution, to avoid a government shutdown when the current-year funding expires at midnight on Sept. 30.

Democratic leaders have to decide whether to attach the debt limit to the short-term spending measure, raise it in a stand-alone vote or use some other legislative maneuver.

“We will have several options,” House Speaker Nancy Pelosi (D., Calif.) told reporters Wednesday. But she said that an increase in the debt ceiling wouldn’t be included in the $3.5 trillion social-services and climate package that Democrats hope to advance through a process known as reconciliation.

Adding a debt-limit increase to the spending patch would require some support from Republicans, as such measures need 60 votes to clear procedural hurdles. In a letter last month, 46 of 50 GOP senators pledged not to support a measure to increase or suspend the limit. The only Republicans who didn’t sign on were Sens. Lisa Murkowski (R., Alaska), Susan Collins (R., Maine), Richard Shelby (R., Ala.) and John Kennedy (R., La.).

White House and Treasury officials, eager to avoid a standoff, were briefing Democratic congressional aides on the importance of raising the debt ceiling last week, but haven’t said publicly which legislative route should be taken. A full default has never occurred, though a fight over the debt ceiling in 2011 rattled markets and helped lead to a downgrade of U.S. credit by Standard & Poor’s.

Investors have begun to price in the possibility of at least a short-term impasse over the debt ceiling in October or November, said Joseph Brusuelas, chief economist at consulting firm RSM US LLP, who estimated the so-called X date would be on Nov. 2.

“Given the risks to the economic outlook linked to the Delta variant, this is no time for a politically induced financial and economic event,” he said Wednesday.

Write to Kate Davidson at kate.davidson@wsj.com and Siobhan Hughes at siobhan.hughes@wsj.com