CCTA FEDERAL WATCHDOG REPORT

Lynn Childs, January 15, 2013

UPCOMING FISCAL FLASH POINTS:

Between Feb. 15 and March 27, the Federal Government will face three separate fiscal flash points:

1) According to a recent report by the Bipartisan Policy Center, the Treasury will, sometime between Feb. 15 and Mar. 1, no longer be able to finance full payment of Federal obligations. In fact, the U.S. Government reached the legal limit of its borrowing authority on Dec. 31, 2012, and has been financing ongoing borrowing using accounting gimmicks (such as delays in payments to certain pension funds, etc.). It is those gimmicks that will expire sometime in mid-February – and with it will expire the Treasury’s ability to pay all the bills that come due on a daily basis.

This is not to say, however, that the U.S. Government would automatically go into default.

“Default” is a term generally recognized to mean the failure to pay one’s debts. Given that the Treasury averages about $200 billion in monthly income (in the form of tax revenues and other payments received), and debt service (that is, paying the interest on the debt) costs about $30 billion per month (based on FY 2012 figures), there would clearly be enough money coming in to make the required interest payments.

Thus, “not raising the debt ceiling” does NOT automatically equate to “default,” despite White House and Treasury Department insistence to the contrary.

The key to understanding this part of the debate is the difference between “obligations” and “debts.” “Obligations” are those payments required by law (in this case, the money appropriated for federal spending – such as defense, Social Security, Medicare, Medicaid, etc.); “debts” are those payments due to bondholders and other creditors of the U.S. Government.

Given that we spend a bit more than $300 billion every month (of which interest payments require about $30 billion), but only take in a bit more than $200 billion per month, it’s clear we have enough to pay our debts, but NOT enough to meet our obligations. So unless the debt ceiling is raised, the U.S. Government would be forced to find ways to stop payments on at least a significant portion of its obligations.

Nevertheless, a failure to raise the debt ceiling could result in a credit downgrade by at least one of the three major credit rating agencies if Congress doesn’t implement any kind of major reforms to prioritize spending and enact meaningful changes to entitlements and mandatory spending programs. Standard & Poors downgraded U.S. debt from AAA to AA+ as a result of the August 2011 debt ceiling fight because Washington failed to implement any reforms to tackle our debt problems. If either Moody’s or Fitch decided to follow suit, that would mean two of the three major credit rating agencies had downgraded U.S. debt – and that would trigger selloffs by major institutional investors (such as pension funds) that are required by their own charters only to hold securities rated at the AAA level. The results for the U.S. economy could be catastrophic.

2) On March 1, the delayed 10-year Sequester spending cuts will hit. The Sequester – a $1.2 trillion cut in projected future spending increases, with 50% taken from defense, 34% taken from nondefense discretionary spending, and roughly 15% taken from mandatory spending programs (exempting Social Security and Medicaid) – was born of the August 2011 Budget Control Act (BCA), offered by President Obama’s White House during negotiations in the summer of 2011 over raising the debt limit.

Opponents of “taking the sequester” – that is, simply allowing the scheduled cuts to go into effect – point out that while defense spending only makes up about 17% of federal spending, cuts to the Pentagon budget make up almost 50% of the planned sequester cuts.

Meanwhile, mandatory spending – principally, Social Security, Medicare, and Medicaid – now take up almost 64% of annual federal spending, but would only be responsible for about 14% of the planned sequester cuts.

And non-defense discretionary spending (the Dept. of the Interior, HHS, the Dept. of Justice, etc.) now takes up just over 13% of annual federal spending, but would be responsible for more than 35% of the planned sequester cuts.

3) On March 27, the 6-month Continuing Resolution that’s been used to finance the operations of the U.S. Government in Fiscal Year 2013 (which runs from Oct. 1, 2012, to Sep. 30, 2013) will expire. Before then, the Congress will have to pass, and the President will have to sign into a law, an appropriations bill(s) to continue to fund the U.S. Government for the rest of FY 2013.

Each of these fiscal flash points provide leverage for fiscal hawks, and offer conservatives the opportunity to press for reductions in planned future spending. But while each offers leverage, each also comes with a price – and the current thinking of House GOP Leadership is that the price related to raising the debt ceiling is too high to pay.

Consequently, the House GOP Leadership will likely introduce legislation in the coming weeks to raise the debt ceiling enough to get through the next few months, so that the order of the upcoming fiscal flash points is staggered differently, with the debt ceiling flash point coming last.

Safe from attack on the grounds that they are willing to throw the U.S. and global economy into further turmoil for their narrow ideological reasons, think the House GOP Leadership, they will be free to press their insistence on reductions in planned future spending by threatening to refuse to pass the needed appropriations bill to fund U.S. Government operations through the rest of the year.

Important Dates:

• January 19, 2013 - Gun Appreciation Day: Many people around the country will be visiting local gun shops, ranges, state capital buildings, etc. to express their appreciation of the 2nd Amendment. You may want to find out where events are happening in your local areas and plan to go to these events to register people to vote and/or get them involved in your local Tea Party group.

• February 15 - March 27, 2013 - Debt Ceiling: Sometime in this date range we are expected to reach the debt ceiling (Technically we have already hit the debt ceiling, but this is the date range when we will reach a point where the Treasury can no longer implement "extraordinary measures" to meet our spending obligations.

• February 28, 2013 - Sequestration: The "fiscal cliff" bill created a new manufactured crisis that will happen sometime at the end of February. This is when the sequestration can was kicked down the road.

• March 31, 2013 - Continuing Resolution: The current Continuing Resolution that the government is operating under expires on March 31. This means that they will have to pass a CR between now and then.

• April 15, 2013 - Budget Resolution: This is the date by law in which both Houses should have a budget resolution passed. We are already hearing that the President is late in submitting his budget, the House is reporting that they will not meet their deadline for a budget, and the Senate... well they haven't passed a budget in over 1,350 days.