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Exclusive: As split Congress odds increase, Yellen warns of need to lift debt ceiling


US Treasury Secretary Janet Yellen attends the G20 Finance and Health Ministers meeting in Nusa Dua, Bali, Indonesia, November 12, 2022. Made Nagi/Pool via REUTERS

With odds of a split U.S. Congress rising, Treasury Secretary Janet Yellen warned that lawmakers’ failure to raise the statutory limit on U.S. debt posed a “huge threat” to America’s credit rating and functioning of U.S. financial markets.

Yellen told Reuters in an interview in New Delhi on Friday that cooperation is still possible with Republicans on some issues, but lifting the debt ceiling is a non-negotiable item.

Some Republicans have threatened to use the next hike in the $31.4 trillion debt ceiling as leverage to force concessions from U.S. President Joe Biden, a Democrat. U.S. public debt stood at $31.2 trillion on Wednesday and without an increase, analysts anticipate a potential default crisis by the third quarter of 2023.

Republicans who took back control of Congress in 2010 elections brought the United States to the brink of default in a demand for spending cuts the next year, prompting a first-ever ratings cut on U.S. Treasury debt by Standard and Poor’s.

Asked whether Democrats should pass legislation in the post-election session, while they would still retain a majority until January, regardless of the election outcome Yellen said raising the debt ceiling was urgently needed.

“I think it’s irresponsible not to raise the debt ceiling. It’s always been raised,” Yellen said. “It would be a huge threat to the country not to do it, and completely irresponsible to threaten the credit rating of America and the functioning of the single most important financial market.”

A U.S. Treasury official said the department would be happy to see the measure passed before the newly elected Congress convenes in January, adding, “It needs to be done.”

Yellen said she was not ready to concede that Biden’s legislative agenda would be stalled by gridlock, adding that she would defend recently passed measures against Republicans who want to gut some of his spending and tax policies.

“We’re certainly going to try to protect the gains we’ve made over the last year and a half,” Yellen said.

If Republicans can win both House and Senate control, some have vowed to pass legislation to make Trump-era tax cuts permanent and roll back parts of Biden’s $430 billion green energy and healthcare subsidy law passed by Democrats.

Among the most frequently targeted measures is $80 billion in new funds for the Internal Revenue Service to boost tax compliance and customer service and a 15% domestic alternative minimum tax for large corporations — the measure’s key funding sources.

Yellen, who is now participating in G20 summit meetings in Indonesia, spoke before Mark Kelly prevailed in a tight Arizona Senate race, leaving Democrats needing just one of two other undecided seats to retain control of the Senate.

In the House, Republicans had won 211 seats, seven shy of a 218 majority.

She said some Republicans backed last year’s infrastructure act and this year’s investments in semiconductors and research, and the administration would look for measures that could draw further bipartisan support.

Another problem Yellen faces with a potentially split Congress is failure to implement a global deal to erect a 15% corporate minimum tax after one Democratic senator objected.

“I want to see it get done. I would have liked the United States to go first. That didn’t happen,” said Yellen, who helped broker last year’s deal aimed at ending a competitive downward spiral on corporate taxes by countries luring investment.

She said she believed most European Union countries would proceed to implement the 15% corporate minimum, which means U.S. firms now paying overseas U.S. taxes of 10.5% may wind up paying the difference to those governments possibly starting in 2024.

“And eventually, as they do, pressure will increase on the United States to come into compliance as well. Because countries that adopted the label will be able to put in place taxes on companies based in undertaxed countries like the United States.”