In light of the potential failure to raise the debt limit, I took a good hard look at the Monthly Treasury Statement for May.
I subtracted the amount of revenues collected in the first 8 months of the year from the estimates for the full fiscal year to get the revenues the government can expect to get between now and the end of September. If the Treasury can not borrow, the only spending it will be able to do is from the cash that is coming in the door. The total expected revenues are $689.35 billion. Of that $512.92 comes from "on budget" sources, mostly from income taxes, and $176.44 billion comes from "off budget" sources, mostly Social Security payroll taxes.
I did the same thing for the expected spending. That total was $1,407.03 billion, of which $1,260.21 billion is for on budget spending. That is pretty much everything the government spends money on with the exception of Social Security. That includes paying the troops in Iraq and Afghanistan, paying for their supplies, the FBI, the FDA, the SEC, salaries for Judges, Federal Prison Guards, Congressmen and bureaucrats. It is also spending on weapons systems and fixing the highways, food stamps the National Parks, etc.
If the debt ceiling is not raised, then spending will have to drop by a total of $717.68 billion for the final four months of the year. There is expected to be a surplus of $29.62 billion on the off budget side, and a $747.30 deficit on the on budget side. Actually it is for the final two months of the year, because by that time June and July will both be over. The total drop will be somewhat smaller, but it will be over a much shorter timeframe. However, I don’t have those hard numbers yet. The June data is due out later this week. Thus I am working from the May data.
Since Social Security has its own dedicated revenue source, and one that more than covers its outlays (right now, there are projections that it will not be able to in the far future), there is a case to be made that it will not be cut, and that Social Security checks will still go out. However I really am not sure about that. If we make that assumption, then we can simply work with the on budget numbers, which simplifies the analysis. Federal pensions, including those for the military have no such dedicated revenue source and those checks would probably not go out.
The Constitution makes it clear that the U.S. can not default on its debt. Personally I think that is a pretty good argument that the debt ceiling itself is unconstitutional, but for the time being lets assume that Obama does not make that assertion and simply ignores the deadline and continues to issue debt. The interest on the debt would have first call on the revenues coming in.
Seriously folks, we would have to pay China the interest on the T-bills they hold before we paid the troops in the field. Interest is expected to be $155.08 billion, or 30.2% of the on budget revenues, and 12.3% of expected spending. Of course even if we don’t formally default, interest rates will probably rise significantly, which in turn will make the interest expense higher. Most of the Federal debt is relatively short term, under five years so we would feel the effects in the relatively short term as well.
All of the reduction in spending would have to come from non interest outlays. In other words, there would just be $592.22 billion left over to spend on $1,105.13 billion of planned non-interest expenditures, a cut of 46.4%. The Federal Government cuts 80 million checks a month. How will it decide on which ones to write and which ones to skip? Quite frankly no one really knows, or if Tim Geithner knows, he has not said.
There is no historical precedent to go on, nor is there any real law governing it. The expected totals for the year are only given at the broad department level. There are probably some programs in each department that absolutely can not be cut at all, while within the departments there are others that will stop completely.
The expected final four month outlay for the Pentagon is $290.30 billion. Not all of that goes to troops actually in the field, or directly supplying them, but that is a big chunk of it. I suspect that Defense would get cut less than other programs. Just for the sake of argument, assume that $90.3 billion of Pentagon spending is cut, and we spend $200 billion. Payments to defense contractors such as Lockheed Martin (LMT) could be deferred, but would probably result in higher overall costs later.
That would leave just $392.22 billion for everything else. The Department of Veteran Affairs has expected outlays of $59.86 billion. I don’t think we are going to close down the VA hospitals and throw the patients out on to the streets, so that too will get a lesser haircut. Let’s apply roughly the same 1/3 cut there as we did to the pentagon, and we are down to $352.32 billion.
The Department of Homeland Security is expected to spend $18.73 billion for the rest of the year. Does it decide to keep the Coastguard in port and not pay the Guardsmen? Does it shut down immigration and customs enforcement? What if another Hurricane Katrina strikes? How would we do if there were no funds available for FEMA? So perhaps that too is held to just a 1/3 cut.
So now we are down to just $340 billion or so for the rest of Government. Would we even know if such a hurricane was about to strike if we had to shut down the National Oceanic and Atmospheric Administration? With no warning, or at least less accurate ones on when and where it will hit, the death toll would be much higher.
Health and Human Services alone is expected to spend $327.73 billion for the rest of the year, mostly on Medicare/Medicaid. Grants to the States for Medicaid made up about a third of HHS spending in the first 8 months of the year. So we are talking about almost $100 billion right there. Do the states pick up the tab? Not when they are facing their own budgetary problems. Do those funds get cut off entirely? Is there some sort of across the board 50% cut? Or could the Administration simply decide that it will pay Iowa but not Alabama? Or do they cut those funds 100%?
Most of the rest of the HHS budget is Medicare. Do we simply not pay the doctors and the hospitals? If so will they continue to see those patients? So we don’t throw veterans out of the hospital and on to the street, but we do it for Grandma?
How about the Department of Agriculture? Can the Administration simply decide to zero out crop payments and cut some food stamps? Food Stamps are 53% of the expected total budget of $55.28 billion for the rest of the year, or $29.23 billion. Are they cut off entirely? Cut across the board a flat percentage? How will those people eat? People on Food Stamps make up about one seventh of the population. What will happen to sales at Kroger’s (KR) and Wal-Mart (WMT)?
Do we simply shut down the Departments of the Interior, Commerce, Education and Energy (outside of the weapons side)? What about the Department of Justice? Is the FBI shut down? How about the Federal Prisons? Do we just let everyone out? Do we put trials on hold since we can’t pay the prosecutors and the judges? Doesn’t that violate the constitutional guarantee of a fair and speedy trial? Do we shut down the Air Traffic Control system and ground all the airlines? Do we shut down all of our embassies abroad? Just forget about trying to get your passport renewed.
Actually this analysis is too optimistic in that it assumes that the expected revenues come in at the expected level. But they will not. Even if we keep all the IRS agents on the job, those Federal workers that get laid off will not be paying income taxes. The incomes of the doctors that are no longer seeing Medicare/Medicaid payments will be lower than currently assumed, and as such they will be paying less in income taxes. Without a doubt, the stock market will plunge, so there will be lower capital gains taxes collected.
Revenues will plummet. With no customs agents, will we be able to import anything, or do we just wing it and let anything be smuggled into the country? While tariffs are no longer a major source of revenue for the government (they made up the bulk of Federal revenues in the 19th century) they would also fall if there is no one there to collect them, or if we stop importing things since there are no customs inspectors. Those falling revenues would force even more cuts.
Lather, Rinse, Repeat.
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