Yellen sees room for US to borrow, opens door to tax hike

WASHINGTON (AP) — Treasury Secretary Janet Yellen believes the U.S. government has more room to borrow, but said higher taxes would likely be required in the long run to finance future spending increases.

Yellen appeared Wednesday before the Senate Banking Committee with the Biden administration considering up to $3 trillion in additional spending on infrastructure, green energy, and education. That “Build Back Better” plan would follow the $1.9 trillion economic relief package approved earlier this month.

Yellen said her views on borrowing have changed since 2017, when she expressed concerns about a federal debt that was equal to about 75% of the U.S. economy's output at the time. That ratio has since increased to slightly above 100%.

Responding to a question from Sen. Richard Shelby, R-Ala., Yellen said the persistence of low interest rates have changed her views on federal debt. Lower rates have made it easier for the federal government to cover the interest costs on the debt, she said. In fact, the government's interest payments as a proportion of the economy are unchanged since 2007, when the debt was equal to just 35% of output, Yellen said.

“I think that’s a more meaningful metric of the burden of the debt on society and on the federal finances,” she said. “And so I do believe we have more fiscal space, but it certainly doesn’t mean that anything goes.”

Yellen said that she supports borrowing to finance the $1.9 trillion aid package because it is temporary spending in response to a crisis.

“But longer run, we do have to raise revenue to support permanent spending,” she said.

The Biden administration is considering a bump in the corporate tax rate to 28%, up from the current 21%, after the Trump administration cut it from 35%. Tax...