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US Treasury Secretary Janet Yellen warned on Tuesday that a US default on its debt would set off an "economic and financial catastrophe," stressing that Congress must not wait until the last minute to make a decision on the matter.

Yellen added that the decision to raise the debt ceiling or suspend it should be "without conditions".

The fight over the debt ceiling has become an annual tradition in Congress between the ruling party (presently the Democratic Party with Janet Yellen being one of its office bearers) and the opposition (presently the Republicans most prominent among which is McCarthy the speaker of the house).

Her remarks come ahead of an anticipated vote this week, organized by McCarthy, on lifting the debt ceiling and reducing spending. The vote comes contrary to US President Joe Biden's calls to unconditionally increase borrowing.

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Biden is advocating for a "clean" lifting of the US borrowing limit, claiming that the deficit spending has already been approved by Congress and is thus not subject to debate.

In January, after the US maxed out its borrowing limit at $31.46 trillion, the US Treasury announced launching "extraordinary measures" to prevent defaulting on debt. Yellen then decided that the Treasury would temporarily suspend payments that aren't urgent and divert the money for more pressing needs i.e. services needed to keep the government operating. 

The Congressional Budget Office (CBO) warned in February that the government could exhaust its funds by July - the final date to decide on the matter - leading to a default on American debt unless Congress raises the current debt ceiling.

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"In my assessment –- and that of economists across the board –- a default on our debt would produce an economic and financial catastrophe," Yellen said on Tuesday.

Failing to see through the crucial decision could mean higher payments on car loans, mortgages, and credit card rates, while businesses could be hit with a credit crunch. The US government could fail to release social security payments, bondholders' dues, and military wages, which would directly impact millions of American citizens.

"This economic catastrophe is preventable," she said. 

"The solution is simple: Congress must vote to raise or suspend the debt limit. It should do so without conditions. And it should not wait until the last minute," she added.

In the long run, a default also means that the government's borrowing costs would increase permanently and future government projects would become much more expensive.

The plan proposed by Republican House Speaker Kevin McCarthy to raise the US debt ceiling in exchange for cuts in government spending was criticized on Monday by Moody's Analytics, who claim the plan would slow growth and cut employment.

The agency argued that if the draft presented by McCarthy on April 17 was passed as is, it would lead to a drop of 0.6 percentage points in US potential growth in 2024 and the elimination of 780,000 jobs.

Addressing other issues on Tuesday, Yellen said the Biden administration's top economic priority is to tackle inflation while safeguarding gains of the last two years.

In comparison to a scenario in which a new ceiling was approved without conditions, unemployment would reach 4.6 percent in March 2024, up from 3.5 percent in March 2023.