Absent a late-hour compromise on Capitol Hill, the U.S. government will run out of money to pay its debts and could begin defaulting on its obligations, piecemeal or all at once, around Oct. 18, according to a report Tuesday.
The Treasury Department officially ran out of conventional funding sources and has been relying on so-called extraordinary measures to pay creditors since May 17. Those measures are expected to run dry somewhere between Oct. 18 and Nov. 5, according to the Bipartisan Policy Center, a think tank.
The bickering political parties now face the prospects of a potential government shutdown if they don’t pass a budget or a resolution to keep funding government before Sept. 30. Weeks later, the special measures that amount to moving funds around run out, the new report said, and the federal government can only rely on incoming revenues for cash on hand of about $50 million per day after mid-October.
The center’s budget experts fear that around Oct. 18, the Treasury Department would be roughly $106 billion short of money needed to pay all the bills due for the next 20 business days. About 32 percent of what’s owed could go unpaid.
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Such a scenario would force the Treasury Department into the unprecedented dilemma of deciding who gets paid and in what order of priority. It could pit big bondholders such as China and Japan against Social Security and Medicare recipients, soldiers against defense contractors and the elderly against students.
“Does it not strike you that this discussion of when the United States might or might not default on debts . . . is the kind of discussion that we simply never would have had 10 or 20 or 30 years ago?” asked Steve Bell, a senior director at the center and a former staff director of the Senate Budget Committee. This “is an extremely irresponsible way to conduct the business of the largest economy and the world’s reserve currency.”
If Tuesday’s report is correct, the federal government had about $108 billion available as of Aug. 31 to move around to keep paying the bills already incurred. This includes measures to put off reinvesting in a federal employees’ retirement fund, as well as postponing investments in the civil service and postal retirement funds.
The government gets some additional wiggle room because of a spike in tax revenue expected by Sept. 16 as some taxpayers pay their quarterly estimated tax payments. But offsetting that benefit, on Oct. 1, the first day of the new fiscal year, the value of military retirement benefits earned during the previous fiscal year is accrued and results in about a $75 billion increase in government debt that pushes the nation closer to the $16.39 trillion debt ceiling.
House Speaker John Boehner, R-Ohio, has already promised a “whale of a fight” over raising the debt ceiling, and on Tuesday the conservative National Review reported that House Majority Leader Eric Cantor, R-Va., told House Republicans of plans to tie a budget deal to a Senate vote to defund the Affordable Care Act, the sweeping revamp of health care policies commonly shorthanded as Obamacare. Subsequently, House Republicans would demand a one-year delay to Obamacare implementation in exchange for raising borrowing authority.
Barring compromise, Treasury Secretary Jacob Lew could be left with two choices. He could prioritize who gets paid, trying to ensure that interest payments to bondholders are at the top of the list. But politicians would be expected to lobby against that in favor of putting politically active Social Security and Medicare recipients at the front of the line. IRS tax refunds and federal salaries might be pushed further back on the priority list.
Another option would be to have the Treasury hold off on any payment until it has enough revenue to meet a full day’s commitments, pushing back payments days or weeks.
“In either case, it would be a chaotic, hectic scenario that we’ve never encountered before,” said Shai Akabas, a senior policy analyst for the center and an author of the report.