July 17th, 2011
Inspired by Our mountain of debt (Washington Post7/17/11).
Annual budgets fade away
When you’re forced to manage cashflow day-by-day.
Republicans keep on repeating the tired refrain that the August 2 deadline is meaningless because interest on the debt, Social Security payments, and national defense are “only” 52% of our annual budget. They’re missing an important point: without an increase in the debt ceiling, the annual budget is meaningless.
The debt ceiling does not regulate how much we are allowed to add to the national debt over the course of the year. It’s like a credit card limit: if you’re over the limit at any time, you’re over the limit. If theUSgoes over that limit, we’re in default of our obligations. Not raising the debt ceiling doesn’t just require that we balance our annual budget. It requires that theU.S.government balance the daily budget.
The federal government isn’t like a family with a regular paycheck: federal income is erratic, which much of it coming in the form of tax payments in April. That money’s now gone, and there are no more giant chunks coming in, just the dribs and drabs of estimated tax payments, withholding, and late payers. It’s meaningless that interest on the debt is 5.4% of the budget for the year, or that Social Security is 20.8%. If either or both of those are 101% of the budget on any given day, then you’re toast.
Unfortunately, it’s July, 10 months into the fiscal year, and most of the year’s tax revenues are already spent. The President can’t go back and retroactively un-spend money that’s already gone. So even though every penny in planned spending has been authorized and approved by the Republican-controlled House, not raising the debt ceiling means that discretionary spending has must come to a virtual halt, and even that may not be enough, depending on a particular day’s cashflow situation.
Not a good situation, and a very bad message to send to creditors and rating agencies. Even if we manage to keep paying them, they’re surely going to get increasingly worried, downgrade credit ratings, and raise their lending rates (something they might even do before the August 2 deadline). Even a 1% point increase in the interest rate would cost $1.4 trillion over the next ten years, and it’s likely that the impact would extend even beyond that. For example, it’s estimated that delay in raising the debt ceiling in 1979 resulted in a permanent increase in interest rates of at least 0.5%: the debt ceiling was raised at the last minute, but a backlog in paperwork led to a delay in making a small amount of interest payments ($120 million, a miniscule amount even back then). Thanks to that delay, we’re now paying $7 billion per year more in interest even 32 years later. So what happens if we have an actual default and larger delays this time?
For the full month of August, the government will have projected revenues of $172 billion and expenditures of $306 billion, for a shortfall of $135 billion. But even that doesn’t tell the whole story, since it’s the daily budget that has to balance if the debt ceiling is not lifted. A propos: on August 3, the federal government is projected to have $12 billion in cash, and will be scheduled to make $32 billion in payments, for a projected $20 billion spread between cash-on-hand and obligations for that day.
Forget for a moment about the $9 billion in miscellaneous spending (including salaries, food, bullets, and other costs for our soldiers overseas) in bills coming due on August 3, some of which Republicans wouldn’t be too broken up about not paying (e.g., $2.2 billion for Medicare/Medicaid, $1.8 billion for the Education Department, etc.). But the $32 billion in obligations coming due on that day includes $23 billion to the Social Security trust fund, and we can’t even afford to pay that: even if we don’t spend a penny on anything else that day, we can only cover about half of the required Social Security payment. So there goes our pristine AAA credit rating, the result of 235 years of responsible behavior.
Have you ever had to live day-to-day, not knowing if you’d have enough money to pay your bills that day, or pay your creditors, or buy food for your kids, or even worse, knowing that you don’t? That’s the previously proudUnited States of Americaon August 3 if we don’t extend the debt ceiling.
Thanks, Grand Old Party.