What Bills Could the Government Pay if the Debt Ceiling is Not Lifted?

When asked about whether the US would actually default if the debt ceiling was not raised, meaning that the US would miss actual US bond interest payments, the President stated today that the issue wasn’t just the bonds.  This is clearly the case since the interest on the bonds is less than 1/10th of the revenues of the country, so missing an interest payment should not occur even without a debt ceiling increase unless the President specifically chose not to pay the debt first.  There is plenty of income to make debt payments, making using the term “default” disingenuous.

The President went on to state that Congress while the debt service could continue – while failing to actually say that he would prioritize it – that the US fiscal credibility would be hurt because it failed to pay “all of the bills” the country has racked up.  He likened it to paying one’s mortgage payments, but not one’s car payment and student loan payment.  Just because you made your mortgage payment, he said, does not mean your credit would not be hurt if you failed to pay on the other loans.

Certainly the country could not continue to fund all of the things it does since we are spending more than we take in.  But the trouble with this analogy is that many of the “bills” the US has are not payments for things it already has purchased, as would be the case with student loans or a car payment.  It is continued spending on programs that are currently in place, but need not be continued, at least not from a legalistic standpoint.  A better analogy would be if a family normally went out to dinner every night and travelled to visit relatives once per month, using the credit cards to pay for one-third of these bills since they did not bring in enough income to pay for the whole amount.  It might “hurt” to stop going out to eat, and certainly it would be difficult to stop seeing family and friends as often when one was use to regular visits, but these are not obligations that would hurt one’s credit score to stop.  In fact, the chance of missing a mortgage payment would increase if one’s credit card balances kept building, so continuing this level of spending would eventually hurt the family’s credit.

For the US the meals out and family vacations are things like universal preschool, military bases, and farm subsidies.  Certainly it would be a difficult choice to cut back on some of these things, but eventually it will be necessary since the debt will eventually overtake the whole economy if we don’t.  Put another way, we can choose to cut back now or be forced to cut back, a la Greece, when the debt becomes unbearable and creditors stop lending money.

If the debt ceiling is not raised, an immediate cut would be required.  Given that the US is expected to spend about $700 B more than it takes in next year, or about $0.7 T on a $3.0 T budget, this would be a significant cut but not an insurmountable one.  In fact, simply returning to 2007 spending levels would eliminate the deficit entirely and begin on the road to debt reduction.

Still, what would these cuts mean?  Would major programs like defense and Social Security be slashed?  Would we need to start rationing Medicare and telling veterans that we could no longer pay for their healthcare as we promised?  Luckily, the answer is no – at least not if spending is reformed now.  Here is a look at which of the major programs/expenses could be funded within current revenues, using 2013 spending numbers:

Debt Payments: $222 B

Defense:  $660 B

Social Security: $818 B

Medicare: $510 B

Post Office: $2.7 B

Veteran Benefits:  $139 B

Total:  2.351 T

2014 Estimated Revenues:  $3.033T

Assuming these programs were funded fully at 2013 levels, this would leave about $650 B for other functions.  Paying the debt would only be $222 B out of $3,030 B, less than 10 % of revenue.  All of the other major functions, such as defense and senior social programs, could be funded with no cuts. There would still be substantial amounts of money left over after these “bills” were paid for things like parks, roads, and education.

Certainly there would be substantial cuts – it is difficult to cut $700 B without having a significant impact – and virtually everyone would see funding for things that they like reduced or eliminated.  However, a family deep in debt needs to cut things they like, such as ballet lessons and cable television as well when their spending outstrips their paycheck.  To get some clue as to what would be eliminated, look at things the US Government was doing in 2007 and things they are doing now.  Things that have been added since that time would need to be eliminated, or things we did before would need to be scaled back and replaced with new spending priorities.  Given that we were in two wars in 2007 and working to rebuild Iraq, there should be some additional revenues available.  Perhaps some of the budget that was rebuilding Iraq could be used to rebuild some of our infrastructure.

Still, the idea that the country could not pay for critical items without taking on more debt does not stand up to scrutiny.  Social Security, Medicare, and Defense could be fully funded.  There would still be money for roads, education, NASA, medical research, and the monuments in Washington.  What would be cut would be decided just as a family would, by listing needs from most critical to least critical and then funding everything that fell within the budget.  To avoid a shock and allow a smooth transition, the country might still need to borrow some more, but there should be a plan to close the budget gap, and soon.

Contact me at vtsioriginal@yahoo.com, or leave a comment.

Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

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