With the threat of a government shutdown beyond us — for now — attention in Washington is turning to the looming debate on raising the federal debt limit.
The current legal limit on government borrowing is set at just under $14.3 trillion. Treasury Secretary Timothy F. Geithner and other economic officials are warning that the limit must increase by early July or the U.S. government will begin defaulting on loans and other obligations, a move that would likely further destabilize the global economy. (Colleagues Lori Montgomery and Zachary A. Goldfarb lay out the stakes in today’s Post)
Republicans say they’re unlikely to secure the votes needed to raise the limit unless the White House agrees to more spending cuts; the White House wants a “clean vote” on raising the debt limit with no strings attached.
Under current estimates, the federal debt limit would have to increase by at least $738 billion in order to finance the government for the remainder of fiscal 2011 through the end of September, according to the Congressional Research Service.
And what happens if Congress and the White House can’t reach an agreement by early July?
Simply put, exceeding the debt limit isn’t likely to bring the government to a screeching halt the way a government shutdown would. Employees wouldn’t be sent packing, and paychecks would still be issued. But hitting the debt limit would likely delay the government’s payment of financial obligations and might disrupt the flow of other normal government operations.
The Treasury Department has yet to face a situation in which it was unable to pay its obligations as a result of reaching the debt limit, according to CRS. But it has taken “extraordinary actions” during previous debt limit debates in order to meet the government’s financial obligations.
If it gets close to the limit, “the federal government implicitly would be required to use some sort of decision-making rule about whether to pay obligations in the order they are received, or, alternatively, to prioritize which obligations to pay, while other obligations would go into an unpaid queue,” CRS wrote in a February report. “In other words, the federal government’s inability to borrow or use other means of financing implies that payment of some or all bills or obligations would be delayed.”
Treasury officials believe they don’t have the legal authority to prioritize which payments to make, meaning the government would have to pay its obligations as they come due, CRS said.
Another possibility: The Office of Management and Budget could reapportion budget spending to slow spending in some cases. Using this approach wouldn’t prevent financial obligations from being paid, according to CRS.
Perhaps the most troubling possibility — at least for federal employees and federal beneficiaries — is that the Treasury could delay investing in various federal trust funds or take money out of them in order to keep cash flow below the debt limit.
Federal law prohibits the government from using the Social Security and Medicare Trust Funds to pay off the debt, but the government may withdraw funds to provide for the payment of benefits and administrative expenses. The Treasury also is permitted to delay investment in the Thrift Savings Plan’s G-Fund and the Civil Service Retirement Fund — two accounts used to finance the retirement of some civilian federal employees and U.S. Postal Service retirees.
Even if the Treasury withheld funds from those accounts, it must make them whole again after a debt limit impasse is over. But tapping them would affect interest payments and payouts to beneficiaries — a scenario the government would hope to avoid.
Reaching the debt limit wouldn’t impact everyday Americans in quite the same way a shutdown could, but the potential impact on the global economy — and the pocketbooks of some federal employees — means we’ll be keeping close tabs on the ongoing debate in the coming months.
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