Budget

Reaching the Debt Ceiling: What It Means

‘Extraordinary measures’ can extend limit about eight weeks.

National Journal
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Katy O'Donnell
April 13, 2011, 9:45 a.m.

Right now, the fed­er­al gov­ern­ment has to bor­row an ad­di­tion­al $125 bil­lion per month to fin­ance all its com­mit­ments — from troops in Afgh­anistan to So­cial Se­cur­ity and Medi­care be­ne­fits for the eld­erly.

What would hap­pen if the gov­ern­ment wasn’t al­lowed to bor­row any more money? 

As the fed­er­al gov­ern­ment once again ap­proaches the $14.3 tril­lion debt ceil­ing im­posed by Con­gress, lead­ers in both parties agree that a re­fus­al to raise the debt ceil­ing would have cata­stroph­ic con­sequences.

But with the GOP vow­ing to fight an in­crease in the ceil­ing un­less Demo­crats agree to much deep­er cuts in spend­ing — “tril­lions rather than bil­lions,” Re­pub­lic­ans say — the pos­sib­il­ity is more con­crete than per­haps ever be­fore.

Treas­ury Sec­ret­ary Timothy Geithner has said the gov­ern­ment will hit the ceil­ing on May 16, though of­fi­cials say they can stretch that dead­line un­til about Ju­ly 8 by jug­gling the gov­ern­ment’s fin­ances.   

But at some point this sum­mer, the gov­ern­ment hits a wall. If it can’t bor­row about $125 bil­lion a month, it will have to be­gin re­du­cing its spend­ing by that amount — im­me­di­ately.

To put that in con­text, the fe­ro­cious hag­gling to pre­vent a shut­down last week was over a mere $38.5 bil­lion in cuts for this en­tire fisc­al year. 

Here’s an­oth­er way to look at the spend­ing cuts that would be re­quired: They would total more than the com­bined amount that the gov­ern­ment spends in an av­er­age month for the Pentagon, the wars in Afgh­anistan and Ir­aq, and So­cial Se­cur­ity be­ne­fits to tens of mil­lions of re­tir­ees. 

Much of the polit­ic­al de­bate over the debt ceil­ing has fo­cused on the cata­stroph­ic ef­fects of a po­ten­tial de­fault by the U.S. on its debt. In­terest rates would skyrock­et as in­vestors pan­ic, in the U.S. and around the world. 

To pre­vent a de­fault, Sen. Pat Toomey, R-Pa., has in­tro­duced le­gis­la­tion that would force the Treas­ury to keep up in­terest pay­ments to its cred­it­ors be­fore pay­ing any­thing else.

Toomey and some oth­er Re­pub­lic­ans ar­gue that the U.S. can avoid a de­fault fairly eas­ily, be­cause in­terest pay­ments to cred­it­ors amount to only about 6.5 per­cent of fed­er­al spend­ing. By con­trast, tax rev­en­ues cov­er about 67 per­cent of all gov­ern­ment spend­ing.

But avoid­ing an of­fi­cial de­fault is only a small part of the prob­lem.

As Geithner warned in a let­ter to Toomey on Feb­ru­ary 3, de­fault­ing on do­mest­ic com­mit­ments would be just as dam­aging to the na­tion’s cred­it­wor­thi­ness in glob­al mar­kets as ac­tu­ally de­fault­ing on in­terest pay­ments, be­cause “the world would re­cog­nize it as a first-ever fail­ure by the United States to meet its com­mit­ments.”

Mar­kets and rat­ings aside, the ef­fects of los­ing bor­row­ing abil­ity for do­mest­ic spend­ing would be cata­stroph­ic.

In ad­di­tion to the mag­nitude of the re­quired spend­ing cuts, the gov­ern­ment would have to deal with huge swings in its month-to-month de­fi­cits.

Fed­er­al re­ceipts vary dra­mat­ic­ally from month to month, with big in­flows around April 15 and when tax­pay­ers make quarterly pay­ments. Re­ceipts last month, for in­stance, totaled $150 bil­lion last month, and the monthly cash-flow de­fi­cit was about $229 bil­lion. But in oth­er months, the short­fall is less than $40 bil­lion.

If Con­gress doesn’t vote to raise the debt ceil­ing by the time it is reached in May, there’s a roughly eight-week grace peri­od be­fore spend­ing stops cold, thanks to elab­or­ate ac­count­ing tricks Treas­ury can em­ploy to give it­self head­room.

Still, Geithner stressed in an April 4 let­ter to Sen­ate Ma­jor­ity Lead­er Harry Re­id, D-Nev., that the so-called “ex­traordin­ary meas­ures” avail­able this time around are lim­ited, com­pared to pre­vi­ous budget im­passes, be­cause the debt is grow­ing at a much faster rate now than it was when ac­count­ing was used to avert de­faults in 1985, 1996, and 2003.

Treas­ury’s first move would be to sus­pend sales of State and Loc­al Gov­ern­ment Series Treas­ury se­cur­it­ies, nor­mally is­sued to help state and  loc­al gov­ern­ments com­ply with fed­er­al tax laws when they have cash pro­ceeds to in­vest from their is­su­ance of tax-ex­empt bonds. Sus­pend­ing sales would elim­in­ate the in­creases in the debt caused by is­su­ing those se­cur­it­ies, but it would be dis­rupt­ive for already-strug­gling states and mu­ni­cip­al­it­ies.

If the debt lim­it is reached, Treas­ury also has the au­thor­ity to de­clare a “debt is­su­ance sus­pen­sion peri­od” on its in­vest­ments to the Civil Ser­vice Re­tire­ment and Dis­ab­il­ity Fund. Treas­ury would then be able to re­deem some ex­ist­ing in­vest­ments in the fund and sus­pend new in­vest­ment. Civil ser­vice be­ne­fit pay­ments would con­tin­ue to be made as long as the ex­ten­sion meas­ures wer­en’t ex­hausted.

Treas­ury could also sus­pend daily re­in­vest­ment of its se­cur­it­ies in the Gov­ern­ment Se­cur­it­ies In­vest­ment Fund of the Fed­er­al Em­ploy­ees Re­tire­ment Sys­tem Thrift Sav­ings Plan, and it could also hold off on daily re­in­vest­ment of its se­cur­it­ies in the Ex­change Sta­bil­iz­a­tion Fund.

Those meas­ures would give the Treas­ury a $230 bil­lion cush­ion, post­pon­ing D-Day on the debt ceil­ing un­til Ju­ly 8.

COR­REC­TION: The graph­ic pub­lished with the ori­gin­al ver­sion of this story mis­stated the “left over” amount needed to reach $125 bil­lion in cuts. The graph­ic has been cor­rec­ted.

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