Washington lawmakers are still trying to figure out how to balance America’s checkbook. But without a plan by early next week, the Obama administration will have to make some tough choices about how to keep the lights on. What would it look like?
The Treasury makes 80 million payments each month. But without the authority to borrow money, the government would rely solely on incoming revenue, meaning it could pay only about 45 percent of its bills.
It wouldn’t take long to feel the pain. On Wednesday, Aug. 3, the government expects $12 billion in revenue but has $32 billion already committed in payments, mostly to Social Security checks, which are mailed at the beginning of each month. The next day, Aug. 4, only $4 billion would come in with $10 billion promised to defense vendors and other social programs.
For the month of August, Uncle Sam would have $172 billion coming in through tax revenue—including federal income tax, property tax, and estate tax—and $307 billion in obligations, according to an analysis by the Bipartisan Policy Center. With that gap, the Treasury Department would have to pick what gets paid and what doesn’t.
There are a couple ways to arrange the puzzle. One is to fund only big-ticket programs, including Medicare and Medicaid ($50 billion), Social Security ($49 billion), unemployment insurance benefits ($12.8 billion), defense vendor payments ($31.7 billion), and interest on the debt ($29 billion)—all totaling $172 billion. But that would leave everything else unpaid, including military pay, federal salaries, and IRS refunds. That wouldn’t be terribly popular.
By dropping defense-vendor payments, you could then pay for food and nutrition programs ($9.3 billion), tuition assistance ($10.4 billion), low-income housing programs ($6.7 billion), and assistance for veterans ($2.9 billion). But still left in the cold would be maintenance of federal highways ($4.3 billion), health and human services grants ($8.1 billion), and the Department of Education ($6.2 billion). Bloomberg Government and the Washington Post both developed websites for folks to try to solve the puzzle at home.
From a default perspective, the math is very simple to keep America in good financial faith. But to keep the economy running, each decision becomes a value judgment. “Some things are imperative to keep from defaulting, like payments on Treasury securities, and payments to people who have already performed services for the government,” such as defense contractors or rent for government offices,” says Peter Morici, former chief economist with the U.S. International Trade Commission. “But everything else is a political judgment that I can’t make.”
Washington’s interest groups have staked out favored programs in what could be a “prioritized budget” in Washington speak. Left-leaning organizations like the Center for American Progress have advocated keeping social and education programs, including housing and nutrition services, as well as the Environmental Protection Agency, charged with protecting clear air and water. Conservative advocates in Washington have pushed different priorities, including defense, tax-refund payments, and paychecks to federal employees. The White House has said it’s begun preparing contingency plans “as a matter of due diligence,” but has shrouded the preparations in secrecy.
The problem also gets trickier with time. By early September, the gap essentially doubles, with only $360 billion in inflows to pay $614 billion going out the door. And the checkbook becomes harder to balance over time. Stopping some payments and shutting down some government agencies means fewer American workers getting paid, which means even less tax revenue coming in the door (not to mention higher unemployment). By October, the amount of monthly tax revenue could be closer to $150 billion with the cost of America’s financial obligations still growing.
Not-so-fun fact: August is generally the worst month of the year for incoming revenue. Slowdowns in productivity, mostly due to vacations, means less tax money coming in, so the $172 billion expected between Aug. 3 and 31 is actually lower than the usual $180 billion per-month average. Not a great starting point for what could grow into a massive problem.