US set to face new debt-ceiling crisis ‘when cash runs out in October’

Government will be in ‘an unacceptable position’, warns Treasury Secretary

Jack Lew: The US Treasury Secretary has warned that the government will soon hit its $17trillion limit (Getty Images)

The Obama administration has warned the country’s politicians that the US will hit its borrowing limit in mid-October, paving the way for the debate about the debt ceiling to be re-ignited when Congress returns to work next month.

In a letter addressed to the Republican leader of the House of Representatives, John Boehner, on Monday, the US Treasury Secretary, Jack Lew, warned that once the US hits the nearly $17trillion (£11trn) limit, the administration would be “left to fund the government with only the cash we have on hand on any given day”.

Based on Treasury estimates, the government’s cash-balance in mid-October is expected to be in the region of $50m.

“Operating the government with no borrowing authority... would place the United States in an unacceptable position,” he said. “The government makes approximately 80 million payments a month... A cash balance of approximately $50bn would be insufficient to cover net expenditures for an extended period of time. And, on certain days, net expenditures could exceed such a cash balance.”

The debt ceiling has been a recurring topic of debate between the White House and the Republicans in Congress. While the administration points out that the raising the debt ceiling does not equal to an increase in government spending, the Republicans have repeatedly used negotiations over the limit to demand spending cuts. Prolonged wrangling over the matter in 2011 led to downgrade of US debt, an unprecedented event that triggered nervousness across world markets.

In his letter, Mr Lew warned that a failure to protect the “full faith and credit” of the US “would cause irreparable harm to the American economy.”

The debate was revived earlier this year when the government hit the ceiling in May, forcing the Treasury to reorganise its finances to allow Democrats and Republicans to come to some kind of agreement.

The issue will resurface once again when lawmakers return to work in September following their August recess. Complicating the issue will be simultaneous negotiations over another budget-related matter: the renewal of a stopgap measure to fund the federal government. The measure, known as a “continuing resolution”, expires at the end next month.

While a failure to raise the debt ceiling would cut the federal government off from accessing the bond markets, a new budget measure is required to avert a government shutdown.

In a preview of the budget battle that is likely to unfold over the coming weeks, Mr Boehner reiterated the Republican position last month. “We’re not going to raise the debt ceiling without real cuts in spending,” he said. “It’s as simple as that.”