WASHINGTON - The Treasury Department said Friday it will halt sales of Treasury securities to state and local governments starting next week because Congress has yet to increase the ceiling on the national debt.
Treasury said in a terse announcement that the sales of the special Treasury notes that states and municipalities use to invest their money for short periods of time will be suspended effective at noon Pacific time on Thursday.
The announcement marked the first of what will likely be a number of maneuvers Treasury will be forced to take to keep from breaching the current debt limit of $8.965 trillion until Congress gives approval for a new debt limit.
Treasury Secretary Henry Paulson said in a letter to Congress this week that the government is expected to hit the current ceiling on Oct. 1. The House has passed legislation to raise the debt limit by $850 billion but the Senate has yet to act.
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Democrats are expected to use the upcoming debate on raising the debt ceiling to highlight what they see as the failures of the Bush administration's economic policies. The budget deficit has been declining in recent years after hitting an all-time high, in dollar terms, of $413 billion in 2004.
In his letter, Paulson sought quick action to increase the limit, saying it was essential to protect the "full faith and credit" of the country, especially at a time of financial market turmoil.
Unless Congress votes to raise the debt limit, the country will be unable to borrow more money to keep the government operating and to meet interest payments on past debt obligations.
The United States has never defaulted on a debt payment, a doomsday scenario that no Congress has been willing to contemplate since it would send the cost of government borrowing sharply higher. However, the political party that does not control the White House has often used the debate over the debt ceiling to score political points about the need to get budget deficits under control.
The Oct. 1 date for hitting the current ceiling does not take into account various maneuvers that the government can take such as withdrawing investment from certain trust funds to create r oom for extra borrowing until Congress finally approves a debt increase.
The action to suspend sales of State and Local Government series Treasury securities is normally the first action the government takes when it is about to hit the debt limit.
The pending request to increase the debt ce iling is the fifth since President Bush took office in 2001. The national debt is the total accumulation of annual budget deficits, which must be financed with borrowed money.
Former Federal Reserve Chairman Alan Greenspan said in his memoirs published this week that Bush and Republicans had abandoned the GOP's conservative principles of favoring small government by failing to fight against rising government spending.
Bush said in an interview on Tuesday that he "would respectfully disagree" with Greenspan's comments. He said "cutting taxes made a significant difference" in the country's finances by spurring economic growth in the wake of a recession and the Sept. 11, 2001, terrorist attacks.