Federal Spending Options If the Debt Ceiling Is Not Lifted

If the debt ceiling is not raised in the very near future, then the U.S. government will only be able to spend the tax revenue coming in every month. No more borrowing until the debt ceiling is raised. How much spending and how much tax revenue exist in August? According to a new report by the bipartisan policy center the U.S. government will spend slightly over $307 billion in August and will receive about $170 billion. There are revenue estimates that are somewhat higher (e.g., $200 billion), but for our purposes we can use the $170 billion figure.

Let us assume the federal government will not default on paying interest on the debt, Social Security and Medicare/Medicaid benefits. What else can we spend the remaining tax revenue on? Here are two possibilities from bipartisan policy center (pages 14-15, 17-18):

Scenario 1: If you choose to pay…For a total of $172.7 billion:

Interest on Treasury Securities $29.0 b
Social Security Benefits $49.2 b
Medicare/ Medicaid $50.0 b
Defense Vendor Payments $31.7 b
Unemployment Insurance Benefits $12.8 b

Scenario 1: Then you cannot fund these programs, worth $134 billion:

Military Active Duty Pay $2.9 b
Veterans Affairs Programs $2.9 b
Federal Salaries + Benefits $14.2 b
Dep. of Education (e.g., Pell grants, special ed. programs) $20.2 b
Food/Nutrition Services + TANF $9.3 b
Dept. of Labor (e.g., training and employment services) $1.3 b
Dept. of Justice (e.g., FBI, federal courts) $1.4 b
Dept. of Energy (e.g., energy research, national nuclear programs) $3.5 b
Health and Human Services Grants $8.1 b
Federal Highway Administration $4.3 b
Environmental Protection Agency $0.9 b
IRS Refunds $3.9 b
Small Business Administration $0.3 b
Federal Transit Administration $1.3 b
HUD Programs(e.g., housing assistance for the poor) $6.7 b
Other Spending $52.8 b

Scenario 2: If you choose to pay…For a total of $173.9 billion:

Interest on Treasury Securities $29.0 b
Social Security Benefits $49.2 b
Medicare/ Medicaid $50.0 b
Food/Nutrition Services + TANF $9.3 b
HUD Programs (e.g., housing assist. for the poor) $6.7 b
Veterans Affairs Programs $2.9 b
Unemployment Insurance Benefits $12.8 b
Special Education Grants $3.6 b
Tuition Assistance $10.4 b

Scenario 2: Then you cannot fund these programs, worth $132.8 billion:

Military Active Duty Pay $2.9 b
Defense Vendor Payments $31.7 b
Federal Salaries + Benefits $14.2 b
Dept. of Education (e.g., Pell grants, special ed. programs) $6.2 b
Dept. of Labor (e.g., training and employment services) $1.3 b
Dept. of Justice (e.g., FBI, federal courts) $1.4 b
Dept. of Energy (e.g., energy research, national nuclear programs) $3.5 b
Health and Human Services Grants $8.1 b
Federal Highway Administration $4.3 b
Environmental Protection Agency $0.9 b
IRS Refunds $3.9 b
Dep. Of Interior $1.2 b
Federal Transit Administration $1.3 b
Centers for Disease Control $0.5 b
Other Spending $51.4 b

As you can see, there will be considerable disruption to many federal departments and programs. We have not seen cuts of this magnitude in federal spending since the end of World War II. Those cuts then were almost exclusively in defense spending and the cuts were imposed through the normal budget process. These cuts in expenditure—what and where revenue will be spent—will be done by the President.

The fact that the cuts are across the spectrum of interests and functions means the prospect for a long delay in raising the debt ceiling is very unlikely. But, a thorough analysis of what spending programs and departments are truly necessary is going to get renewed scrutiny and sets up an important topic for debate in the elections of 2012.

Author: Jim Granato, Director, Hobby Center for Public Policy

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