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4 Ways the Debt Ceiling Debacle Could Play Out

It's expected that Treasury will not be able to cut the checks starting sometime between Feb. 15 and March 1.

by
Bill Straub

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January 17, 2013 - 12:28 am
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WASHINGTON – After veering away at the last minute from a fiscal cliff over federal spending Congress and the White House appear to be racing toward another economic precipice, this one dealing with the nation’s debt limit.

According to outgoing Treasury Secretary Tim Geithner, the federal government hit its debt limit – the amount of money the Treasury can permissibly borrow to fund governmental functions – on Dec. 26, 2012. The Treasury has taken steps to avoid immediate shortfalls but the federal government could soon find itself in default of its obligations if the ceiling, set at $16.4 trillion, isn’t raised.

“Our numbers show that we have less time to solve this problem than many realize,” said Steve Bell, senior director of the Economic Policy Project at the Bipartisan Policy Center. “We estimate that Treasury will exhaust its borrowing authority and no longer have sufficient funds to meet its obligations in full and on time at some point between February 15 and March 1. It will be difficult for Treasury to get beyond the March 1 date in our judgment.”

President Obama tussled with congressional Republicans over the most recent debt limit increase during the summer of 2011, ultimately resulting in the Budget Control Act of 2011, which not only raised the ceiling but cut scheduled government spending increases. On Aug. 5, 2011, four days after the legislation became law, Standard & Poor’s downgraded the federal government’s credit rating for the first time in history, lowering it from AAA to AA+, a move essentially making it more expensive to borrow money.

The General Accounting Office, in a report issued last July, found that the congressional delay in approving the 2011 debt ceiling hike cost the Treasury $1.3 billion.

“Congress usually votes on increasing the debt limit after fiscal policy decisions affecting federal borrowing have begun to take effect,” the report found. “This approach to raising the debt limit does not facilitate debate over specific tax or spending proposals and their effect on debt.”

Congress, the GAO said, “should consider ways to better link decisions about the debt limit with decisions about spending and revenue to avoid potential disruptions to the Treasury market and to help inform the fiscal policy debate in a timely way.”

This go-round, with congressional Republicans again insisting on spending concessions before approving any increase, the president has vowed that he will not engage lawmakers over the limit, asserting at a news conference on Jan. 14 that he refuses to negotiate “with a gun at the head of the American people.”

“It would be a self-inflicted wound on the economy,” he said. “Even entertaining the idea of this happening, of the United States of America not paying its bills, is irresponsible. It’s absurd.”

Republican leaders have not backed down. Some lawmakers are demanding budget cuts equal to the amount of the debt limit increase.

“The American people do not support raising the debt ceiling without reducing government spending at the same time,” said House Speaker John Boehner (R-Ohio). “The consequences of failing to increase the debt ceiling are real but so too are the consequences of allowing our spending problem to go unresolved. Without meaningful action the debt will continue to act as an anchor on our economy, costing American jobs and endangering our children’s future.”

So how will this play out? There exist several potential scenarios:

DEFAULT

Opinions differ on what might happen in the immediate aftermath if Congress refuses to act and the Obama administration finds its hands tied. The U.S. defaulting on its debts is uncharted territory. One analysis finds that the Treasury will collect $277 billion in revenue between Feb. 15 and March 15 and face $452 billion in scheduled payments. That means about $175 billion in obligations – 39 percent of the government’s tab — will go unpaid.

Geithner acknowledged Internal Revenue Service refunds, Medicare, Medicaid, Social Security, and interest payments could be affected.

“If we reach the X Date and Treasury is forced to prioritize payments, handling payments for many important and popular programs will quickly become impossible, causing disruption to an already fragile economic recovery,” Bell said.

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