U.S. Treasury Secretary Janet Yellen sits to testify before a Senate Finance Committee hearing on U.S. President Joe Biden’s proposed budget request for fiscal year 2024, on Capitol Hill in Washington, U.S., March 16, 2023.
Mary F. Calvert | Reuters
WASHINGTON — Treasury Secretary Janet Yellen said Thursday that China would be among the first in line to get paid under a Republican proposal to prioritize some U.S. debt obligations over others, calling it a “dangerous idea” that would technically cause the U.S. to default on its bonds.
House Republicans are holding up a bill to raise the U.S. debt ceiling, which hit its $31.4 trillion borrowing limit in January. They want any agreement on the debt limit to be paired with spending cuts on social programs.
Their latest debt ceiling proposal, which passed 21-17 out of the House Ways and Means Committee last week, would prioritize which payments the U.S. Treasury makes first when the U.S. hits the ceiling at which it cannot issue more bonds. The GOP plan places a higher priority on making public debt obligations and Social Security payments than other types of government obligations.
“The government on average makes millions of payments each day, and our systems are built to pay all of our bills on time and not to pick and choose which bills to pay,” Yellen said during a Senate Finance Committee hearing on the federal budget. “There is a reason that Treasury secretaries of both parties have rejected this incredibly risky and dangerous idea and it’s never been tried before.”
Democrats have pointed out that the Republican plan to prioritize payments would benefit Wall Street and China, since they hold most government bonds. China holds about $1 trillion of U.S. debt, about 3% of all U.S. debt outstanding.
“If Treasury follows this Republican plan, bearing in mind that China holds about $1 trillion in U.S. debt, who would get paid first?” asked Sen. Sherrod Brown, D-Ohio.
“Well, if that were prioritized, China would get paid ahead of them,” Yellen answered, referring to seniors who get Social Security and veterans who get VA benefits. She added that debt prioritization is “default by another name.”
Economists have called the suggestion to pay some debts incurred by the government over others “badly misguided.”
“I cannot give any assurances about the technical feasibility of such a plan,” Yellen told lawmakers. “It would be an exceptionally risky, untested and radical departure from normal payment practices of agencies across the federal government.”
She said lawmakers needed to recognize that “raising the debt ceiling is their responsibility to protect the full faith and credit in the United States.”
The Treasury Department has initiated temporary measures in recent months to escape default, including suspending new investments in certain federal retirement programs and a health benefit fund. The measures are set to expire in June.
“We need to pay our bills. We need to pay all of our bills. That willingness and commitment to be responsible in paying bills that have already been incurred is what underlies the United States’ strong credit rating,” Yellen said.
“If we were to fail to pay any of our bills, that would call into question whether or not we deserve our current credit rating. And it’s simply a recipe for economic and financial catastrophe to think we can pay some of our bills and not all of them,” she added.