Definitions of fiscal deadlines and consequences

Definitions of fiscal deadlines and consequences

There are some technical terms being thrown around indiscriminately in the press. This is a quick clarification so you know how to distinguish among them.

Three fiscal deadlines loom.

  1. The fiscal cliff law delayed the spending sequester so that it is now scheduled to cut spending beginning on March 1.
  2. The Continuing Resolution (CR) that substituted for all 12 regular appropriations bills expires on March 27th.
  3. Without an increase in the statutory debt limit, some time in late February or early March Treasury will face a cash crunch as it tries to meet all its obligations on time.

In addition,

  • CBO will come out with their new baseline in late January.
  • The President’s budget is due February 4 but it appears he’ll miss that deadline, maybe by a lot.
  • The House and Senate should be marking up budget resolutions in March and considering them on the floor in late March.

If the first deadline (the sequester on March 1) passes without legislative action, across-the-board spending cuts will begin. Republicans generally like that as an aggregate fiscal policy matter, but they don’t like that defense is on the chopping block. No law means the sequester begins.

If the second deadline (CR expires on March 27) passes without legislative action on appropriations, major parts of the federal government will shut down. In those parts of government, only those employees who are essential to preventing loss of life or property (e.g., Coast Guard rescue personnel, air traffic controllers) can work. Other parts of the U.S. government close until and unless appropriations bills are enacted. This is typically called a government shutdown. Entitlement checks continue to be cut.

If the third deadlines (cash crunch after no debt limit increase) passes without legislative action, at some point Treasury will not have enough cash on hand to pay all of its obligations on time. The President must then choose whether to miss or delay debt payments to those holding Treasury debt, or instead to delay payments to others owed government funding, including Social Security beneficiaries, veterans, States owed payments for Medicaid and welfare and highways, and defense and other contractors for goods and services they provide to the federal government.

Missing or delaying a debt payment on Treasury debt is called default. Missing or delaying other government payments is sometimes called technical default or defaulting on our obligations. While default sounds like technical default, they’re quite different. The first directly threatens the full faith and credit of the U.S. government as a borrower and is a direct attack on our government’s credit rating and borrowing costs. The second is terribly irresponsible, and the government would be sued by whoever’s payments were delayed, but it’s a full step less egregious than defaulting on Treasuries.

When talking about the consequences of these deadlines I classify default as an order of magnitude more potentially damaging than either a government shutdown or a technical default. And while the sequester is painful to the policy goals of the areas being cut (national security, cancer research, border protection), from a fiscal policy perspective it’s cutting government spending and that’s a good thing.

It gets confusing because each of these could result in less money being spent by government, or at least less being spent right now. The sequester will cut spending by a fixed percentage across-the-board for a large portion of government (but far from all of it). If the CR expires without a new law, funding for a large part of the government will suddenly drop to zero. If there were a default [shudder], government payments to holders of U.S. Treasuries would be missed or delayed, and if there were a technical default, payments to others who have legal obligations to be paid by the government would be delayed.

I hope this helps.

(photo credit: Tom Hynds)

 

10 responses

  1. It is wrong to claim that social security checks might not be issued if the debt limit were not raised. The trustees of Social security hold ~4T$ of bonds. If current FICA revenues are not sufficient to pay benefits, they must sell some of those bonds to pay the benefits. Given that the gap between monthly collections and monthly payments is fairly small in comparison to the amount of bonds owned by social security. They could go several years without missing a payment.

    • Walter — The problem is that these are very special bonds which can only be put to the US Treasury for payment…not sold on the open market…

      • Lenny, the IOUs in the Social Security Trust Fund count against the debt limit. When the SSA needs money to send out the checks it sends them to the Treasury who goes into the markets to borrow the money. There isn’t a net increase in debt since the borrowed amount equals the canceled amount. Thus Walter is right.

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  3. Keith,

    You seem to be glossing over another needed distinction, between:

    (1) missing/delaying payment on money owed to suppliers, employees, etc. for services and products already provided (i.e., already an expense per accrual accounting and already a current liability), as well as money that will unavoidably become due per contract for services/products not yet provided…

    vs.

    (2) forgoing services and products that have not yet been provided (or unavoidably contracted) and which could be forgone — despite having had funds allocated for them or current law mandating them — by laying off employees, forgoing/delaying orders from suppliers, changing entitlement laws, etc.

    The president, other politicians and the media have not only misleadingly conflated missing/delaying payment on Treasury debt and missing/delaying payment on money owed to others (not bondholders), as you point out, but are also misleadingly conflating my #1 and #2 above, as you are, too. Thus, they insist emphatically that raising the debt limit “has nothing to do with new spending”, but rather, they claim, is simply what is needed “to pay our bills” for “what we’ve already spent”.

    As just one example, here’s a non sequitur from yesterday’s Eugene Robinson column in WaPo: “Raising the debt ceiling has nothing to do with future spending; it merely provides the funds for expenditures Congress has already approved.” http://www.washingtonpost.com/opinions/eugene-robinson-republicans-destructive-game-of-chicken/2013/01/14/92452362-5e92-11e2-9940-6fc488f3fecd_story.html The sleight of hand there is the unstated premise that we incur a liability — i.e., a debt, money we owe someone for something — as soon as Congress approves the expenditure. Unless I’m missing something here, that is not the case.

    This distinction is particularly important given that revenues would be more than sufficient to cover Treasury debt service and other payments per what we actually owe for services/products already provided (or are otherwise unavoidably contracted to pay) to employees and suppliers, meaning we could avoid both “default” AND “technical default”.

    I’m not saying the bond market would feel completely certain that we would pay bondholders on time at the expense of others who would be adversely affected by the substantial spending cuts necessary to bring spending down to projected revenue levels (and perhaps then some to provide some cushion), and I certainly don’t mean to imply that we could go on indefinitely without raising the debt limit without severe harm to the economy (it would mean a sudden cut in federal spending equal to 6% of GDP!), but I do think the above distinctions are needed fro the nation to have an informed, rational discussion/debate (and I’d hate for exposure of the above misleading statements to obscure the very real harm and risk of failing to raise the debt limit for long).

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