The federal government is about two weeks away from being unable to pay its bills — and that could delay benefit payments to tens of millions of retirees, Medicare and Medicaid providers, and numerous others receiving checks from the U.S. Treasury.
Running into the federal borrowing limit could lead to a catastrophic default on the nation’s debt. Once the government reaches the ceiling — and exhausts all other measures to keep payments flowing — it will run out of funds for bills it has already promised to pay.
Democrats are looking at changing filibuster rules to avoid such a catastrophe. Senator Mitch McConnell from Kentucky, the minority leader has suggested that a temporary increase could be allowed up to December, but this would only delay a default deadline of a matter weeks.
The government has never fallen behind on its obligations so it is impossible to predict what might happen. The effects could be extensive, affecting programs such as Social Security benefits or school lunches.
“There is no public playbook for what to do when you breach the debt limit,” said Marc Goldwein, senior policy director at the Committee for a Responsible Federal Budget, a fiscal watchdog group. “We don’t know what will happen.”
What programs might be affected?
It covers a lot of people.
A default could potentially — but not necessarily — delay the payment of Social Security benefits, which reach about 65 million Americans in some form.
It could also cause delays in payments to government contractors, such as hospitals that receive patients who are eligible for Medicare or Medicaid benefits. The situation could impede access to healthcare if it continues for weeks, or even months, Whitney Tucker, the deputy head of research on the State Fiscal Policy team, stated in a recent memo.
Some state-run programs that use federal funds, such as those that provide free or reduced-cost lunches and breakfasts to students of low income, may not be immediately reimbursed. The Supplemental Nutrition Assistance Program, also known as food stamps in the past, might also be affected.
It would likely stop payments to families under the expanded child tax credit. In July, eligible families were sent half of the credit each month. The July benefit was received by approximately 35 million families.
When could this happen?
That’s not totally clear. Janet L. Yellen (Treasury secretary) has stated that the government will reach the debt ceiling on October 18. Some analysts believe that the actual date could have been pushed back by a few more days or even extended.
It’s important to note that this situation is different from a government shutdown, which happens when Congress fails to pass bills that permit new spending. Officials at the White House warn that running up to the debt ceiling can be far more harmful.
Won’t the government still have some money?
Yes, the Treasury will have some revenue coming in — from estimated quarterly income taxes, excise taxes and other sources — but the department has maintained that it does not have the authority to pick and choose which payments it will make.
“There is only one viable option to deal with the debt limit: Congress needs to increase or suspend it, as it has done approximately 80 times, including three times during the last administration,” a Treasury spokesman said.
But if no agreement is reached, some policy experts say that the Treasury may ultimately have to pick winners and losers — and that’s a difficult bind, because there are several conflicting laws at play.
While the law says that the government can’t borrow once it has reached the debt limit the 14th Amendment of the Constitution says the United States must honour its obligations. Other laws require that certain benefits and salaries be paid.
Is there any other thing the government could do to help?
Len Burman, an Urban Institute fellow, stated that the Treasury could decide to issue more bonds regardless and leave it up to the Supreme Court for the Constitutional questions.
“They could ignore the debt limit,” he said. “It is a question that has never been adjudicated because it hasn’t come up before.”
But previous administrations have rejected that approach, he said, and legal experts don’t agree about whether it would actually work.
Learn the U.S. Debt Ceiling
What is the debt ceiling The debt ceiling, also called the debt limit, is a cap on the total amount of money that the federal government is authorized to borrow via U.S. Treasury bills and savings bonds to fulfill its financial obligations. The U.S. has a budget deficit and must borrow large sums of money in order to pay its bills.
What about Social Security, though?
Social Security — which reaches tens of millions of Americans through retirement, disability and survivor benefits — is a bit different from other programs because it is largely financed through a dedicated payroll tax. Experts say that the trust funds it has may allow it to be more flexible.
The taxes coming into the program aren’t enough to pay all of the benefits, according to Jason J. Fichtner, chief economist at the Bipartisan Policy Center, who held several positions, including acting principal deputy commissioner, at the Social Security Administration. The checks are sent on a staggered schedule, so the agency could wait for more cash, which could lead to delayed payments.
But there’s also at least one other possibility. If the Treasury redeemed the special-issue bonds from the program’s trust fund to pay benefits — and then quickly replaced them with newly issued bonds — that wouldn’t raise the debt ceiling, Mr. Fichtner argues.
It’s not clear whether the Treasury agrees with his assessment.
What else could possibly happen?
If the United States were to default on its debts — that is, stop making payments on the Treasurys it has sold — there would almost certainly be major consequences in the global markets.
Investors holding portfolios such as pension funds or holders of 401(k),s would experience a market tailspin. Even after any debt-ceiling standoff were resolved, global investors would demand higher interest payments on U.S. Treasury bonds — so the government’s borrowing in the future could become more expensive.
Consumers may be more likely to default if they are unable to obtain loans.
“In the case of a debt default, it would quickly spark a credit crunch so the issue for borrowers becomes much more about whether you can get a loan in the first place,” said Greg McBride, chief financial analyst at Bankrate.com. “Lenders would likely freeze or cut credit lines on home equity lines of credit and credit cards. Personal loans would be harder to get and could see higher rates.”
What if the problem isn’t quickly resolved?
A prolonged impasse would cause significant damage for the U.S. economy, Wendy Edelberg, and Louise Sheiner, both senior Fellows at Brookings Institution, a research organization, wrote in a report.
“Even in a best-case scenario where the impasse is short-lived, the economy is likely to suffer sustained — and completely avoidable — damage, particularly given the challenges that Covid-19 poses to the health of the economy,” they wrote.
If it dragged on through November, the federal government would have little choice but to significantly slash government spending by roughly $200 billion — a “devastating” blow to the economy, Mark Zandi, chief economist of Moody’s Analytics, said in a recent analysis.
In the long term, the additional cost of borrowing will only make matters worse.
“Americans would pay for this default for generations,” he said.
Source: NY Times