The debt ceiling is again at the center of our national debate. All sides would benefit from a better understanding of this critical but poorly understood provision — particularly the risks it presents — so they can make fully informed decisions.
What will happen if the debt ceiling is not raised and the federal government runs short of cash and is unable to pay all of its obligations? Using publicly available data, the Bipartisan Policy Center has projected daily government cash flows through August 2011 to assess the effects on federal operations, as well as the market risks.
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One day in early August, the Treasury Department will lack sufficient cash to pay all of its obligations going forward. For simplicity, we call this day the X Date. In May, Treasury estimated the X Date as Aug. 2, which has proved reasonably accurate. Based on more recent data, our analysis shows that the date may fall as early as Aug. 2 but could arrive a week later. Treasury will provide an update shortly.
After the X Date, we estimate that about 44 percent of August 2011 bills could not be paid. Some argue that the government can “prioritize” payments — that is, pay some bills but not others — and thereby avoid a bond default. Treasury and the Federal Reserve strongly oppose prioritization, which would require Treasury to select from among roughly 80 million monthly payments, paying the winners but not the losers.
The United States has never prioritized or failed to pay any obligation when due during a debt limit impasse. Despite the institutional risks and the lack of clear legal authority, we assume that Treasury will attempt to prioritize payments in a last-ditch effort to avoid default.
Federal Government Operations: For Aug. 3-31, 2011, we project inflows of $172 billion and bills due of $306 billion — a shortfall of $134 billion. As an illustration, Treasury would exhaust all inflows just by paying six major items: interest, Medicare, Medicaid, Social Security, unemployment insurance and defense vendors. Without cutting from these six, there would be no money for entire departments such as Justice, Labor and Commerce among many others, or for veterans’ benefits, IRS refunds, military active duty pay, federal salaries and benefits, special education, Pell Grants for college students or food and rent payments for the poor. An overnight 44 percent cut in spending would slash many popular and essential programs.