Failure to Raise U.S. Debt Cap Seen Idling 800,000 Workers

Republican Presidential Candidate Tim Pawlenty
Republican presidential candidate Tim Pawlenty speaks at the Council on Foreign Relations on June 28, 2011 in New York City. Photographer: Spencer Platt/Getty Images

The U.S. government wouldn’t be able to fund about 50 percent of its obligations and would have to furlough about 800,000 federal workers if Congress fails to approve an increase in the $14.3 trillion debt ceiling, a coalition of former budget officials says.

Sometime in the first half of August, no funding would be available for the Departments of Veterans Affairs, Education, and Housing and Urban Development, as well as unemployment insurance and Internal Revenue Service refunds, according to a report by the Bipartisan Policy Center in Washington.

“The reality would be chaotic,” Jay Powell, the author of the study and a former Treasury undersecretary under President George H.W. Bush, said at a news conference when the report was released. “Treasury would be picking winners and losers.”

The report represents a challenge to Senator Pat Toomey of Pennsylvania, Representative Michele Bachmann of Minnesota and other Republicans who dismiss the risks of a government default. Republican presidential candidate Tim Pawlenty said today Republicans should hold out for deep spending cuts before raising the debt ceiling, echoing the position of his party’s congressional leadership.

Cash Flows

The report, earlier obtained by Bloomberg News, evaluated Treasury cash flows in the month of August for the past several years.

There would be just enough to cover payments for Social Security, Medicare and Medicaid and military personnel, assuming Treasury Secretary Timothy Geithner gives those programs priority, according to the study.

“There are a lot of people on both sides of the American political spectrum now that would rather have a fight than actually do something,” Geithner said on June 24 at Dartmouth College in Hanover, New Hampshire. Some have a “dangerous illusion that somehow if we defaulted on our debt, stopped paying our obligations, that would be a way to balance our budget.”

The coalition of former budget officials, including Alice Rivlin, a budget director under former President Bill Clinton, and Republican Pete Domenici of New Mexico, who was the longest-serving chairman of the Senate Budget Committee before his retirement, are speaking out as negotiations over a debt-reduction package before Treasury’s Aug. 2 deadline have suffered setbacks.

Obama Meeting

President Barack Obama met for more than an hour yesterday with Senate Minority Leader Mitch McConnell, a Kentucky Republican, in the wake of last week’s collapse of bipartisan negotiations led by Vice President Joe Biden.

Bachmann, Toomey and some other Republicans have been discounting the effects of a default as they encourage members of their party to withhold their votes for increasing the debt ceiling unless certain spending-cut conditions are met.

“These are scare tactics by the Obama administration,” Bachmann, who declared her presidential candidacy yesterday, said in an interview today on CBS’s “The Early Show.”

Pawlenty, speaking on MSNBC, said Republicans should raise the debt ceiling only if they “get something permanent and structural and meaningful,” including a balanced-budget amendment and spending caps. Asked what would happen if the limit weren’t raised, the former Minnesota governor said, “well, we don’t know that.”

Report Circulating

The policy center’s report has been circulating for the past week among House Republicans as the coalition seeks to counter claims that not raising debt ceiling will have a minimal impact on the federal government and financial markets.

The Treasury would have $203.3 billion inflows for the month while owing $362.7 billion, leaving it with a deficit of $159.3 billion, according to the report.

Also, in August Social Security benefits cost $49.2 billion, Medicare and Medicaid cost $68.6 billion, defense venders and personnel cost $34.6 billion and unemployment benefits total $12.8 billion. This totals $165.2 billion in spending requirements, more than the $159.3 deficit on hand for spending.

“Failure to avert this crisis would have dire consequences,” Senate Majority Leader Harry Reid, a Nevada Democrat, said on the Senate floor today. “It would result in the most serious financial crisis this country has ever faced.”

Before it's here, it's on the Bloomberg Terminal. LEARN MORE