Federal debt obligations outpace federal agency spending, notes CRS
Unless Congress votes soon to raise the current $14.29 billion debt limit, the United States faces the certainty of defaulting on its obligations after midnight of August 2. But even were the federal government to have completely stopped spending on discretionary programs in the second half of the current fiscal year, the $688 billion saved would still not have been enough to cover federal debt obligations, says the Congressional Research Service in a June 3 report.
Discretionary spending is what funds nearly all operations of federal agencies; federal benefit payments are known as mandatory spending, and the government has $1.05 trillion worth of mandatory obligations in the second half of the current fiscal year. Federal fiscal years begin every Oct. 1.
In order for the government to continue operating at its current levels through Sept. 30, the Treasury Department must issue an additional $738 billion in debt--but without congressional authorization, it cannot. Economists such as Federal Reserve Chairman Ben Bernanke have predicted "a huge financial calamity," but the immediate effect on the federal government would not be the same as a congressional failure to pass appropriations bills, the report says, quoting a 1995 Congressional Budget Office study.
The CBO concluded that "employees would not be sent home, and checks would continue to be issued," in contrast to when the government must immediately shut down thanks to a lack of funds appropriated by Congress.
However, were the Treasury Department to become low on cash, "there could be delays in honoring checks and disruptions in the normal flow of government services," the CBO said.
Failure to limit the debt limit would cause a backlog of unpaid contractor bills to accumulate, perhaps causing them to accumulate interest penalties under the Prompt Payment Act, which requires the government to respond with money within 30 days of confirming that it has received a good and proper invoice (it has 7 days to so confirm).
As to whether the Treasury Department would be able to prioritize obligations so that it pays interest on outstanding debt before other obligations, the CRS report leaves that open as a question. Treasury has said prioritization would be unworkable because adopting a policy requiring certain types of payment to take precedent over other legal obligations by the federal government "would merely be default by another name, since the world would recognize it as a failure by the U.S. to stand behind its commitments."
The Government Accountability Office in 1985, the CRS report says, concluded that Treasury could prioritize, since Congress hasn't explicitly prohibited it from favoring one debt obligation over another.
A government default would destroy the existing credit system and cause a massive run by the public into cash, asserts a July 18 article posted on Slate.com.
"There is no company in the United States that would be unaffected by a government default--and no bank or other financial institution that could provide a secure haven for savings. There would be a massive run into cash, on an order not seen since the Great Depression, with long lines of people at ATMs and teller windows withdrawing as much as possible," the article says.