Who will Uncle Sam pay if there’s no debt deal?

Jane Sasseen
Editor-in-Chief, Opinion and Politics
Exclusives

By JANE SASSEEN
Yahoo! News

Come Aug. 3, just who will get paid?

That's the new worry coursing throughout Washington as the contentious debt ceiling negotiations hurtle towards Aug. 2, the deadline beyond which President Barack Obama has warned that the government risks running short of money to pay all of its bills.

If the government has to choose which of its many obligations to honor and which to delay, who will it pay -- and, more importantly, who will it be forced to cut off?

Chinese bondholders?  Social Security recipients? Medicaid beneficiaries? Veterans or FBI agents? With the clock ticking, it's no longer a theoretical  question.

"We are running out of time," the president said in a statement at the White House Friday morning, little more than 12 hours after House Speaker John Boehner (R-Ohio) was forced to call off a vote on his two-stage bill to trim $2.5 trillion from the budget in the face of stiff opposition from conservatives.  The House finally passed the bill Friday evening, but it was quickly rejected by the Senate, where Democratic leaders are preparing their own rival bill. Congressional leaders and the White House are expected to spend much of the weekend wrangling over the competing proposals.

Treasury officials have drawn up emergency plans to prioritize payments if Congress doesn't vote to raise the government's borrowing ability above the current $14.3 trillion level before the maximum is hit. Without a deal, Treasury will have no choice but to start to triage between its many payments.

It won't be easy. The federal government makes payments to some 80 million individuals, companies and entities every month. While it takes in roughly a couple of hundred billion dollars every month in revenues, it spends tens of billions more.  Some 40% of the current budget is paid with borrowed money.

"A de facto shutdown of the government is the real threat, not default, " says Greg Valliere, chief political strategist for the Potomac Research Group.

The key question is what date the government will hit the current debt ceiling. That's when it will no longer be able to borrow to make up the difference between revenues and expenditures. That's why Aug. 2 looms as a critical deadline -- a big Social Security payment is due the following day.  In mid-July, analysts at Barclays Capital estimated that Treasury would have only $30 billion in cash on hand the morning of Aug. 3 — not enough to pay the $22 billion owed to Social Security recipients plus the additional $10 billion owed to others that day.

While higher-than-expected revenues in recent days could give the government a few more days wiggle room beyond that, the trajectory is clear.

"Without an agreement, the only question is when, not if, we'll run short of cash," says Jay Powell, a former Treasury official under President George H.W. Bush who has analyzed the issue in a report for the Bipartisan Policy Center, a Washington-based think tank.  "There's just no way to pay for everything."

The triage could begin as early as Aug. 3. One possibility is that Treasury would simply pay the bills in the order they come in. But most observers believe such a move would be too politically risky; the administration is far more likely to make sure Social Security recipients and other politically-sensitive constituencies get paid.

So who would be the winners and who would be the losers?

Start with the math: between Aug. 3 and the end of the month, the Treasury will pocket an estimated $172 billion in taxes and other revenues, according to Powell. Over that same time, it has to shell out roughly $307 billion in payments for everything from Social Security and veterans' health care benefits to money for highway construction and federal workers' salaries.

Given that huge gap, the administration would essentially have to decide who to stiff, at least temporarily. Here's a look at how the choices could play out:

INTEREST ON US TREASURY BONDS: One thing on which all analysts agree: Holders of U.S. Treasury bonds, whether they are hedge fund managers in New York, retirees in Florida, or central bankers in China, will have first dibs on the remaining cash. They would get paid before all other creditors. That's the only way the U.S. can avoid a potentially disastrous default on its bonds and a serious downgrading of its credit rating.

So the first $29 billion—the estimated interest payments Treasury owes for the month of August--will go straight to bondholders.  That would leave Uncle Sam with $143 billion in cash to cover another $278 billion in bills coming due in August.

SOCIAL SECURITY: Another point of accord between Democrats and Republicans: no one, but no one, wants to see TV screens fill with interviews of outraged seniors. Nor is anyone foolish enough to want to face the political consequences of cutting them off. So count on Social Security payments to take second priority when it comes to cutting checks.

For August, Uncle Sam owes Social Security payments of $49 billion. Draw that down, and Uncle Sam would have only $94 billion left to take care of the remaining $299 billion in expenditures.

MEDICARE/MEDICAID: Now throw in Uncle Sam's biggest health care obligations, Medicare and Medicaid. They will account for another $50 billion in August. Some analysts suggest Medicare would be fully funded, while the federal government could try to cut back on the Medicaid payments it owes to the states. But that remains to be seen.

If the administration does fund all of those health care obligations, then Uncle Sam would be down to only $44 billion in cash, to divide among the $179 billion needed in August to fund the military, social safety net expenditures such as unemployment insurance and housing aid for the poor—not to mention the entire rest of the federal government.

MILITARY SPENDING: Cutting off veterans or soldiers could be just as politically poisonous.  However, those costs are relatively small: $2.9 billion each for Veterans Affairs programs and pay for active duty military members. They are likely to be paid.

The big expenditure comes in payments to the thousands of defense contractors across the country: Uncle Sam will owe defense contractors some $31.7 billion in the month of August.  Many of them could see payments delayed until the crisis is resolved.

"Treasury will be able to prioritize within defense," says Daniel Clifton, who oversees policy research for Strategas Research Partners. "They build battleships that take years to complete; can they really argue they need that payment today?"

SOCIAL SAFETY NET: Juggling the programs aimed at supporting the unemployed, the poor and the sick will be tough; many could see cuts as the money runs out.  Unemployment insurance benefits will cost some $12.8 billion for the month, while food aid for the poor would run to $9.3 billion. Housing aid programs for August would be another $6.7 billion. Grants for tuition and special education would run another $14 billion.

Fund all those programs, on top of Social Security, Medicare and interest payments, the BPC's Powell points out, and there would be virtually nothing left for the vast majority of defense spending.  The Administration would have to choose: protect the safety net, and much of the military will go unfunded. Pay for defense, and many on the home front will suffer.

Moreover, whatever the choices the White House makes to divvy up the dollars between military and social spending, neither leaves much room for funding the rest of the government. Salaries and benefits alone for federal employee would cost another $14.2 billion in August — one reason many could find themselves furloughed if push comes to shove.

"There's just no way to avoid the pain," says the BPC's Powell. "If you opt to pay for Social Security, Medicare and a few other priorities, there's no money left over for a Justice Dept, a Defense Dept., an Energy Dept. or most other things."

Jane Sasseen is the editor-in-chief of politics and opinion at Yahoo! News.

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