(Imagine the legal challenges if the executive branch were to indefinitely postpone payments related to a particular program enacted by Congress.) Courts would have to determine whether Treasury could prioritize interest payments while the legal challenges were being resolved-adding another layer of uncertainty. While the motivation to pay principal and interest on time to avoid a default on Treasury securities is clear, lawsuits would probably argue that Treasury has no authority to unilaterally decide which obligations put in place by Congress to honor. Timely payments of interest and principal of Treasury securities alongside delays in other federal obligations would likely result in swift legal challenges. Thus, national parks and other government agencies would likely remain open, but federal workers’ paychecks would be delayed. That’s because federal agencies would still have legal authority, provided by Congress, to obligate funds. In other words, it will delay payments to agencies, contractors, Social Security beneficiaries, and Medicare providers rather than attempting to pick and choose which payments to make that are due on a given day.įederal employees would likely continue working during a debt-limit impasse in contrast to the government shutdowns that occur when Congress hasn’t enacted appropriations bills.
#MIRROR ONE AND ALL BOX SET FULL#
Treasury would delay payments for all other obligations until it had at least enough cash to pay a full day’s obligations. And, as securities mature, Treasury would pay that principal by auctioning new securities for the same amount (and thus not increasing the overall stock of debt held by the public). Treasury would continue to pay interest on those Treasury securities as it comes due. Under the 2011 plan, there would be no default on Treasury securities. Treasury did have a contingency plan in place in 2011 when the country faced a similar situation, and it seems likely that Treasury would follow the contours of that plan if the debt limit were to bind this year. One cannot predict how Treasury will operate when the debt limit binds, given that this would be unprecedented. Treasury operate when the debt limit binds? If a portion of this advantage were lost by allowing the debt limit to bind, the cost to the taxpayer could be significant. Given the current level of the debt, this translates into interest savings for the federal government of roughly $50 billion next year and more than $750 billion over the next decade. Some estimates suggest that this advantage lowers the interest rate the government pays on Treasuries (relative to interest rates on the debt of other sovereign nations) on the order of 25 basis points (a quarter of a percentage point) on average. government pays a lower interest rate on Treasury securities because of the unparalleled safety and liquidity of the Treasury market. Policymakers should not assume they have several months to work out a solution. That uncertainty underlines the urgency around this issue. Estimates of the X-date range from early June to early fall the range is so wide because the delay in the tax filing deadline for those affected by storms in California makes the pace and amounts of federal tax particularly uncertain this year. The timing of when Treasury will not have enough cash to meet its obligations-the so-called “X-date”-is uncertain because it depends on the inflows of federal tax payments. Even in a best-case scenario where the impasse is short-lived, the economy is likely to suffer sustained-and completely avoidable-damage. An extended impasse is likely to cause significant damage to the U.S.
government is unable to pay all its bills-it depends on how long the situation lasts, how it is managed, and the extent to which investors alter their views about the safety of U.S. However, there is an enormous amount of uncertainty surrounding the damage the U.S. The economic effects of such an unprecedented event would surely be negative. Treasury does not have the ability to pay its obligations, the negative economic effects would quickly mount and risk triggering a deep recession. As our colleagues Len Burman and Bill Gale wrote, “Raising the debt limit is not about new spending it is about paying for previous choices policymakers legislated.” Those obligations are the result of laws previously enacted by Congress. Sometime after that, unless Congress raises or suspends the debt limit, the federal government will lack the cash to pay all its obligations. Treasury estimates that those measures will be sufficient through at least early June. hit that limit-$31.4 trillion-on January 19, 2023, but the Department of the Treasury has been undertaking a set of “extraordinary measures” so that the debt limit does not yet bind. The debt limit caps the total amount of allowable outstanding U.S.
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