Yellen scraps GOP plan to prioritize debt payments

Treasury Secretary Janet Yellen, appearing before the Senate Treasury Committee on Thursday, said unequivocally that she did not think a Republican proposal for the US to prioritize its debt payments in the event of a default was unfeasible.

The US bumped into the federal debt limit in January, forcing the Treasury Department to take “extraordinary measures” to make its payments. Without an increase or suspension of the federal debt limit, the Treasury Department could default on its commitments sometime this summer or early fall — an outcome Yellen and many economists have warned could lead to a global financial disaster.

However, some Republicans believe the US can avoid a technical default by prioritizing its debt payments, even when other obligations, such as paying salaries at government agencies, go unpaid. An invoice added last week by the House Ways and Means Committee would direct the Treasury Department how to prioritize its payments if the debt ceiling makes it impossible to fully meet all federal obligations.

The “Default Prevention Act” would require the Treasury Department to first pay all principal and interest on the federal debt, as well as all Social Security and Medicare benefits. After those payments are made, the Treasury Department would have to prioritize defense and veteran benefits. It would also be prohibited from paying government travel and salaries for the Executive Branch and Congress until all other obligations are met.

Yellen clearly stated that she didn’t think such a plan would work. “The government makes millions of payments a day on average, and our systems are designed to pay all our bills on time and not choose which ones to pay,” she told the committee. “It’s just a recipe for economic and financial disaster to think we can pay some of our bills and not all.”

Yellen also said she “cannot make any representations about the technical feasibility of such a plan. It would be an exceptionally risky, untested, and radical departure from normal agency payment practices across the federal government.”

Yellen called prioritizing debt “a standard by another name” and urged Congress to skip contingency planning for disasters and instead “come together to recognize that raising the debt ceiling is their responsibility, the full confidence and creditworthiness of the to protect the United States”.

The bottom line: Republicans have announced their intention to use the need to raise the debt ceiling as leverage in their campaign to cut federal spending. Though they are yet to come up with a detailed budget, the fact that they are discussing contingency plans suggests that at least some GOP lawmakers are caught up in their debt-limiting game with the White House.

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