Bipartisan Policy Center Releases New Analysis on Debt Limit

Washington, D.C. – An analysis released today by the Bipartisan Policy Center (BPC) confirms that at some point in early August, unless the debt ceiling is raised, the federal government will be unable to meet all of its spending obligations. BPC’s analysis also shows that, after that date, federal spending would be reduced by as much as 44% for the remainder of August, as the Treasury prioritizes payments to remain under the debt limit.

“Based on publicly available data, we have estimated daily cash flows through the end of August 2011. Our analysis shows that the government will be unable to pay all of its bills on August 3 or sometime soon thereafter,” said BPC Visiting Scholar Jay Powell, a former Under Secretary of the Treasury for Finance under President George H. W. Bush.

Under a system of prioritization, to pick one illustration, Treasury could exhaust all inflows for the month of August by paying only six major items: interest on our existing debt, Medicare, Medicaid, Social Security, unemployment insurance and defense contracts. Without cutting from these items, there would be no money to fund entire U.S. departments, such as Justice, Labor, and Commerce. There would also not be funds to pay for veterans’ benefits, IRS refunds, military active duty pay, federal salaries and benefits, special education programs, Pell Grants for college students or food and rent payments for the poor. “The choices would not be pretty,” said Powell.

Moreover, BPC’s research shows that the day-to-day outlook would be even more harrowing. For example, if the cash shortage begins on August 3, as projected by Treasury, the government could find itself unable to make a $23 billion Social Security payment that has to go out that day.

In addition to its failure to meet federal obligations, the market for Treasury securities would also face significant risks. If Treasury is forced to prioritize its payments, the rating agencies have stated that they will immediately put the United States’ sovereign debt on watch for a downgrade. Furthermore, BPC identifies a potential source of market risk in the need to “roll over” almost $500 billion dollars in maturing Treasury securities during the month of August.

Former Senate Budget Committee Chairman Pete Domenici, a BPC Senior Fellow, said that, “the debt ceiling tends to be ignored for long periods of time, and then is suddenly thrust into the center of legislative action. We at the Bipartisan Policy Center realized that a deep, factual look at what might happen if the debt ceiling were not raised was needed.”

Click here to read BPC’s full analysis and here to learn more about BPC’s methodology.

Through BPC, Senator Domenici and Dr. Alice Rivlin led a bipartisan task force of 19 former White House and Cabinet officials, former Senate and House members, former governors and mayors, and business and labor leaders, which released its bold, comprehensive plan to address the nation’s debt crisis last November, titled Restoring America’s Future.

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