With under a month left until the U.S. hits its statutory limit to borrow more money, Republicans and Democrats continue to disagree about what exactly would happen if Congress and the president fail to reach an agreement that raises the debt ceiling.
"Failure to raise the limit would precipitate a default by the United States," wrote Treasury Secretary Timothy Geithner earlier this year. No, that's not true, say Republicans. There's enough federal revenue to pay the interest on the debt as well as fund the troops and entitlement programs.
According to a study by the Bipartisan Policy Center (BPC), Treasury could indeed avoid a debt default by prioritizing payments, but failure to raise the debt ceiling would mean deep and immediate cuts.
“It all depends on what you mean by default. I don't even want to get into the labeling contest,” BPC's Jay Powell told me in an interview. “It is clear that there is enough cash coming in to let you pay interest on the debt. That is a true fact.”
“It's also clear that there's nowhere near enough money to pay all of your legally mandated obligations, so one might say you’re defaulting on your non-debt obligations. But again I don’t want to get into the labeling contests,” said Powell who served as Under Secretary of the Treasury for Finance under George H.W. Bush.
The BPC study found that the United States is likely to hit the debt limit sometime between August 2 and August 9. “It’s a 44 percent overnight cut in federal spending” if Congress hits the debt limit, Powell said. The BPC study projects there will be $172 billion in federal revenues in August and $307 billion in authorized expenditures. That means there's enough money to pay for, say, interest on the debt ($29 billion), Social Security ($49.2 billion), Medicare and Medicaid ($50 billion), active duty troop pay ($2.9 billion), veterans affairs programs ($2.9 billion).
That leaves you with about $39 billion to fund (or not fund) the following:
Defense vendors ($31.7 billion)
IRS refunds ($3.9 billion)
Food stamps and welfare ($9.3 billion)
Unemployment insurance benefits ($12.8 billion)
Department of Education ($20.2 billion)
Housing and Urban Development ($6.7 billion)
Other spending, such as Departmens of Justice, Labor, Commerce, EPA, HHS ($73.6 billion)
The decision to prioritize payments would fall on the Treasury department, and Powell points out it would be chaotic picking and choosing who gets paid (in full or partially) and who doesn't.
Powell notes, however, that Congress made sure during a budget standoff in 1996 that Social Security recipients would not be affected. “In 1996, during an impasse, [Treasury Secretary] Bob Rubin gave the Congress notice that he would be unable to pay the March ’96 Social Security payment. Congress immediately—and I mean, immediately—passed a law that allowed the Treasury to borrow money specifically for that purpose and exempted that borrowing from the debt limit.” While the U.S. wouldn't default on its debt, Powell argues that failure to raise the debt ceiling could spook the credit markets and lead to higher rates. But that's a risk many Republicans are willing to take if the alternative is accepting a rotten deal.
“I understand where some of the Republicans are coming from," Powell told me. "They do actually think on our current path a crisis is inevitable. In five years it’s going to be worse, so let’s push this thing really hard, and if we have to have it now, let’s have it now. To which my response is: There's every reason to think we're still working on this and there's plenty of time to fix this."