Well, here we are close to one of the riskiest financial days in U.S. history, and it’s still business as usual for the Congress and the President. With only 7 days left before the U.S. Government won’t be able to officially pay all of its bills, our illustrious leaders still can’t agree on a plan to raise the $14.3 trillion debt ceiling. While a default would not signal the end of the economic world as the U.S. knows it, there are still potentially catastrophic consequences that could result from a default.
Credit rating agencies are already threatening to downgrade U.S. debt, a move that could add hundreds of billions to the cost of interest payments on that debt. An actual default on the approximately $15 trillion in debt owed, doesn’t necessarily have to happen for the downgrade to occur. In fact, the closer we get to the August 2nd date when the U.S. Government will be unable to cover all of its expenses, the more likely that a downgrade will occur. Yet, Republicans refuse to agree to tax hikes, and Democrats remain unwilling to abandon the failed policy of funding overspending on entitlement programs.
Although a default is highly unlikely, it’s beneficial to look at the position the country may find itself in, if an agreement by both parties and the President is not met by the drop-dead date of August 2nd. According to the Bipartisan Policy Center, as reported in Barron’s Magazine’s Editorial Commentary on July 25th, during the remainder of July and for August, the federal government will receive approximately $172 billion in additional income against $306 billion in expenses. This will leave a $134 billion deficit, which cannot be covered unless both parties agree to raise the $14.3 deficit ceiling. In actuality, the government is already in debt to the tune of $15 trillion, but by using creative accounting principles, has temporarily avoided reaching the cap.
So, where would the possible cuts have to come from if a deal isn’t struck by the August 2nd deadline? According to the BPC above, after paying the $29 billion in interests payments on Treasury Paper, the government would have only $143 billion to cover $277 billion in costs. In other words, it would have to cut about 50% of all government programs, including major costs as follows:
- $49 billion in Social Security benefits
- $50 billion in Medicare and Medicaid payments
- $31 billion in Defense Spending
- $14 billion in Federal Salaries and Benefits
- $12 billion in Unemployment Benefits
- $3 billion in Active Duty Military Pay
- $3 billion in Veterans Benefits
- $9.3 billion in Food Stamps and Welfare Benefits
- $4 billion in IRS Refunds
- $10 billion in aid for College Tuition
Any way you slice it, there are going to be lots of unhappy voters if our leadership is unable to get their act together. And, remember, the cuts would only cover what would be necessary for the government to operate through August. They do not take into consideration the tens, or even hundreds of billions of dollars of costs the government would incur to fund the debt in the coming months and years if rating agencies downgrade the debt.
Everyone agrees that our politicians need to make some very difficult decisions right now! If we can only get them to do something about it…