While its far from certain how, exactly, the Treasury Department would handle a default — including whether it would prioritize certain payments or delay paying the government’s bills — the think tank noted that about $50 billion in Social Security benefits are set to go out in the first half of June, in addition to more than $20 billion in payments to Medicaid providers, $6 billion in federal salaries, $12 billion in veterans benefits and $1 billion in SNAP benefits, also known as food stamps.
And those hugely significant payments are just a few that could be affected, the Bipartisan Policy Center cautioned, and don’t represent an “exhaustive” list “of all cash flows on a particular day.”
The Biden administration has already dismissed the untested idea of paying some bills but not others, arguing that it would be unfair to average Americans, cause widespread economic disruption and prove logistically impossible. A more likely scenario, in the event of a default, is that Treasury would choose to delay all bills, waiting until there’s enough revenue to cover all payments for any given day, the Bipartisan Policy Center said.
The think tank’s new projection piles further urgency onto Tuesday’s debt limit meeting at the White House, despite slim prospects for a major breakthrough between Democrats insisting on a straightforward hike and Republicans pushing for major concessions in return for their debt votes. What remains unclear, though, is whether the Treasury Department can limp along paying the bills until June 15, when quarterly tax receipts would provide a cash infusion and likely stave off default through the end of next month.
If Treasury can hold off a default until the end of June, it would be able to tap into about $145 billion in new “extraordinary measures,” buying the government a little more borrowing power into the summer. The coming weeks will offer more clarity about whether Treasury can make it to mid-June and give Congress and the White House a longer ramp to negotiate a debt limit deal, said Shai Akabas, BPC’s director of economic policy.
“I still don’t think now is the time for panic, but it’s certainly time to start getting concerned,” Akabas said, noting that Treasury “is skating on very thin ice” next month due to low cash flows.
The Treasury cash crunch that could cripple the U.S. economy in the coming weeks stems in part from a disappointing tax season, mixed with delayed tax filing deadlines for residents of states like California that sit in designated disaster areas, Akabas said.
Other estimates that point to a potential debt catastrophe in early June also underscore that considerable variability in the X-date will remain — until perhaps just days before the U.S. would officially default — thanks to the often unpredictable nature of federal cash flows.
After Yellen issued her warning last week, the independent Congressional Budget Office also said it sees “a significantly greater risk that the Treasury will run out of funds in early June.”
Mark Zandi, the chief economist for Moody’s Analytics, told senators during a Budget Committee hearing on Thursday that the X-date could fall on June 8. He added that Yellen’s early warning of June 1 is also very possible, as is a “best case scenario” of Aug. 8.
The distress signals from government and outside forecasters have done nothing to jumpstart talks between the White House, which is insisting on a “clean” debt limit increase, and Republicans, who are demanding spending cuts in exchange for lifting the borrowing cap. The Biden administration has refused to negotiate, vowing to keep government funding on a separate track.
A number of Republicans aren’t feeling the pressure either, viewing Yellen’s early June projection as nothing more than a political ploy aimed at squeezing the GOP to swallow a clean debt hike. Akabas said Yellen’s warning is consistent with how the Bipartisan Policy Center is analyzing the situation, however, noting that “no risk is too small a risk to flag.”
“Yeah, I don’t think she’s playing games,” Zandi concurred in an interview last week.
Experts say that financial markets are starting to signal trouble ahead amid the debt standoff, particularly among yields in short-term Treasury securities, and that those cracks will only start to worsen as the country lurches closer to the limit. The U.S. is also at risk of another credit rating downgrade, a painful consequence of the debt ceiling standoff that gripped Washington more than a decade ago.
Pressure from the markets is what may ultimately force action, Zandi said.
“I don’t think lawmakers will act until they’re pushed to act by the stock market and the bond market saying, ‘If you guys don’t, this is what’s going to happen’,” Zandi said. “There’s going to be a lot of red on the screen, a lot of 401Ks are going to be diminished and there’s going to be a lot of angry people.”
