Unless Congress raises the country’s borrowing limit, the government will run out of cash to pay its bills no later than October 17, putting the country at imminent risk of default, the Treasury Department said.
The announcement of the deadline ramps up the pressure on lawmakers who are currently struggling to pass a short-term budget in the next six days to avoid a government shutdown. They are similarly at odds over the debt ceiling, but economists warn that breaching the debt limit would do much greater damage than a shutdown.
Given Congress’s ongoing deadlock over the short-term budget, there is no clear political path to raising the debt ceiling. That’s fueled fears of a default on Treasury debt—a virtually unprecedented event that’s expected to have devastating financial and economic consequences. Markets here and abroad would tank. Bondholders would demand higher interest rates for holding U.S. debt, which would raise borrowing costs for governments, businesses, and prospective homebuyers.
The government already hit its borrowing limit in May, but the Treasury Department has been able to use what it calls “extraordinary measures” to increase its borrowing capacity temporarily. Such measures, however, will be exhausted by mid-October, Treasury Secretary Jack Lew said, when the government will run out of money to make its legally obligated payments.
At that point, the government would have only $30 billion in cash on hand, while its daily expenditures “can be as high as $60 billion,” Lew wrote in a letter to House Speaker John Boehner. In other words, the government wouldn’t have enough money to pay its bills and would risk default every day thereafter.
The Treasury Department had previously estimated that it would have $50 billion in available cash in mid-October, but recent tax revenues were lower than expected.
Analysts also warn there could be additional, unforeseen consequences for the event of a U.S. default over the debt limit. “Nobody knows what will happen because we’ve never done this before, and it’s extremely rare of great nations to not pay their own debts on time,” says Steve Bell of the Bipartisan Policy Center. “This would be a black swan event, and it’s going to happen at one of the worst possible times, coming in the wake of a great financial calamity called the Great Recession.”
While a government shutdown could change Congress’s political calculus over the debt ceiling, practically speaking, it would do little to affect the October 17 deadline. A shutdown would halt paychecks to government employees, military, and contractors. But those are only a fraction of the 80 million payments the Treasury makes every month to bondholders, Social Security beneficiaries, Medicare providers, veterans, and many others, Bell explained.
Especially if it’s brief, a shutdown wouldn’t buy Congress any more time to deal with the debt ceiling. “It will be within the rounding error,” said Bill Hoagland of the Bipartisan Policy Center, a former Republican Senate budget aide.
Lew rejected the notion that the government could cushion the effects of default by deciding which payments to prioritize, as House Republicans proposed to do in a recent bill. ”Any plan to prioritize some payments over others is simply default by another name,” he said in the letter. “There is no way of knowing the damage any prioritization plan would have on our economy and financial markets.”
Congressional Republicans have continued threatening to use the debt ceiling as a negotiating chip. The House now plans to vote on a bill that would tie the borrowing limit to delaying Obamacare for a year, among other demands.
President Obama has refused to negotiate over the debt ceiling this time around. When he did so in 2011, the debt-ceiling deal that passed cut spending by $900 billion and resulted in the across-the-board sequestration cuts that he and his party have since condemned.
On the left, there’s also growing fear that negotiating over the debt ceiling a second time would enshrine the practice for future Congresses, putting the country’s economy and markets into a chronic, perilous state of uncertainty. In 2011, the brinksmanship around debt ceiling cost the government $1.3 billion that fiscal year in increased borrowing costs, according to the Government Accountability Office—and that was a scenario in which we avoided default. The Bipartisan Policy Center estimates that the 2011 negotiations will ultimately cost the country more than $19 billion over 10 years.
This time around, “it will cost at least that much, if we go up until the last second,” says Bell. Despite Obama’s vow not to bargain over the debt-ceiling, the tight timeframe and Republican demands make it increasingly likely for negotiations over the borrowing limit—which enables the government to pay the bills it’s already racked up and legally obligated to pay—to get lumped together with budget negotiations over the government’s future spending.
If Congress can’t pass a stopgap budget, known as a Continuing Resolution, by September 30, the government will shut down on October 1, and the government could default just 16 days later. “As a practical legislative matter it will become very difficult to solve the CR without in some way making progress or solving debt ceiling,” says Bell.