US Treasury Secretary Jacob Lew has issued a categorical warning that the United States will default on its US$16.7 trillion debt and throw the world into turmoil unless Congress agrees to raise the legal debt ceiling by October 17.

"Congress is playing with fire. If the US Government, for the first time in its history, chooses not to pay its bills on time, we will be in default," said Lew. "Anyone who thinks that the United States Government not paying its bills is anything less than default hasn't thought about it very clearly," he told NBC's Meet the Press.

Lew said the treasury had already exhausted its normal funds in May and has been "creating room" by resorting to one-off tricks, but these, too, have run dry. The Government will have just US$30 billion ($36 billion) by October 17, half what is needed to cover immediate needs over subsequent days.

"That is a dangerously low level of cash, and we're on the verge of going into a place we've never been," he said.


Lew's comments mark an escalation in the game of chicken on Capitol Hill. They suggest the White House has for now ruled out a drastic fiscal squeeze to balance the books if there is no deal.

Goldman Sachs said any attempt to balance the budget overnight would require savage cuts, stopping economic recovery in its tracks. "We estimate the fiscal pull-back would amount to 9 per cent of GDP. If this were allowed to occur, it could lead to a rapid downturn in economic activity if not reversed quickly," it said.

Expected tax revenues over the month after October 17 will cover just two-thirds of federal spending.

The US Treasury has said the dispute could lead to a "catastrophic" collapse.

Republicans have accused the Obama Administration of whipping up hysteria to browbeat Congress. House Republicans have refused to raise the debt limit unless the White House agrees to roll back the Affordable Care Act, dubbed "Obamacare". Speaker John Boehner said yesterday he did not have the votes to raise the debt ceiling unless Obama gives ground, though there were signs Congress is starting to crack, with moderates floating a compromise based on tax reform.

Bank of America said the Republicans' tough line is a high-risk strategy since Obama believes he is on stronger political ground. The risk for the world is that headstrong Republicans force the issue. Lew's warnings suggest the White House may call their bluff, calculating that they will suffer greater opprobrium. Whoever is to blame, it is no way to run a railroad, let alone a superpower.