Republicans and Democrats seem further apart than ever in negotiations over raising the nation’s debt ceiling, but most lawmakers will return to Capitol Hill this week fully convinced that they can’t miss the Aug. 2 deadline set by Treasury Secretary Timothy Geithner. Geithner last week warned of “the catastrophic economic and market consequences of a default crisis” if Congress does not increase the government’s borrowing limit by the deadline.
While there is some debate over the precise date the United States would actually run out of money, most experts and lawmakers warned that on Wednesday, Aug. 3, Americans could wake up to a barely functioning government.
If there is no agreement beyond deadline, most predict the United States will eventually have to default on its loans, which economists say would significantly rattle the financial markets and damage the nation’s fragile economy.
“If we pass that date without a debt limit increase, it will require us to immediately cease to honor 44 percent of our obligations during the month of August,” said Jay Powell, a former undersecretary of the treasury under President George H. W. Bush and a visiting scholar with the Bipartisan Policy Center. “You cannot cut spending in that magnitude overnight without cutting really important and popular programs.”
Powell, who managed the nation’s debt during his tenure at Treasury, helped author a 31-page analysis at the center showing that, without the increase, the Treasury would take in about $172 billion in tax revenue in August, but need to pay $306 billion in expenses. That would create a $134 billion deficit requiring the government to pick and choose which programs are paid for and which would have to be cut.
The government may have difficulty coming up with the $23 billion in Social Security checks scheduled to go out on Aug. 3, Powell said. And while it would have to pay the interest on its loans to avoid going into default, the government would have to decide whether to keep other entitlement programs afloat, including Medicare and Medicaid. Food stamps and unemployment insurance are other possible spending priorities.
Beyond that spending scenario, the government wouldn’t have much more money to operate.
There would be nothing left to pay soldiers, including those fighting overseas, or federal workers, who by law cannot work unless they are being paid.
Unlike during the recent threat of a government shutdown, when only nonessential employees had to stay home, this time, the courts, FBI, Bureau of Prisons and other essential operations would cease to operate.
And anyone waiting for a refund from the Internal Revenue Service can forget about seeing a check.
Perhaps even more ominous is the likely prospect of the nation’s credit rating being downgraded, which would cost the nation billions of dollars in higher interest rates and limit its ability to borrow.
Some Republicans have argued the Treasury has additional money to balance its books until the end of August.
But Senate Majority Leader Harry Reid, D-Nev., who cancelled a scheduled recess this week, told The Washington Examiner he believes people are minimizing the threat of missing the Aug. 2 deadline.
” ‘The sky is falling’ is not a dire enough warning,” Reid said.
