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