Regular Americans Could Face Debt Ceiling Disaster
By: Brian O'Connell

NEW YORK (BankingMyWay) — Just when you thought it was safe to go back to your recovering economy, government watchdog groups are saying any delay in lifting the debt ceiling could push the economy not only back into recession, but cause millions of Americans to get stiffed by Uncle Sam.

That conceivably could include groups including taxpayers seeking a refund, military veterans counting on retirement benefits and federal employees looking for a paycheck.

According to the Bipartisan Policy Center, the U.S. Treasury would face a severe crisis — as will those millions of Americans, if the debt ceiling isn’t raised by some $1.1 trillion by Feb. 15.

The center says in a Monday policy report, Debt Limit Analysis:

The United States hit its debt limit on Dec. 31. The treasury secretary then began tapping into roughly $200 billion of emergency borrowing authority — referred to as “extraordinary measures” — to allow for an additional period of fully funded government operations.

In 2011, extraordinary measures extended the federal government’s ability to pay its obligations from May 15 until Aug. 2. They won’t buy as much time as they did last summer.

BPC estimates the U.S Treasury Department would have a “substantial negative operating cash flow” of $175 billion between Feb. 15 and March 15, with $452 billion in scheduled payments due in that period — “including big ticket items like Internal Revenue Service tax refunds for individuals, Medicare, Medicaid and Social Security payments and interest payments on the debt — while projected revenue totals only $277 billion during that same period.”

Without any action taken by Congress, the center says, time is growing short before chaos strikes.

“Based on financial data from Treasury, we estimate that the government will be unable to pay all of its bills as early as Feb. 15, also known as the X date,” says Steve Bell, director of the economic policy project at the center. “Our numbers show that we have less time to solve this problem than many realize. We estimate that Treasury will exhaust its borrowing authority and no longer have sufficient funds to meet its obligations in full and on time at some point between Feb. 15 and March 1. It will be difficult for Treasury to get beyond the March 1 date, in our judgment.”

“If we reach the X date and Treasury is forced to prioritize payments, handling payments for many important and popular programs will quickly become impossible, causing disruption to an already fragile economic recovery,” Bell says.

How bad can the situation get? And what choices would the federal government make on paying bills — and ignoring others?

The BPC lays out one intriguing and frightening scenario in which Uncle Sam would have to pick and choose who gets paid and who doesn’t come March.

Here is how the center breaks it down:

2013 Inflows and Outflows: Feb 15 to March 15

In: $277,107 billion

Out: $451,883 billion

Deficit: $174,776 billion

From Feb. 15 to March 15

The federal government would pay:

  • Interest on U.S. Treasury securities — $38.1 billion
  • IRS tax refunds — $85.5 billion
  • Medicare/Medicaid — $72.5 billion
  • Social Security benefits — $61.1 billion
  • Military pay and retirement — $13.2 billion
  • Unemployment insurance benefits — $6.2 billion

Total: $276.6 Billion

The federal government would choose not to pay:

  • Defense vendor payments — $28.8 billion
  • Veterans’ benefits — $4.2 billion
  • Federal salaries and benefits — $19.9 billion
  • Education loans and grants — $16.8 billion
  • Food and nutrition services (school lunches, etc.) — $10.1 billion
  • Civil service retirement — $5 billion
  • Health and Human Services grants — $8 billion
  • Supplemental Security Income — $3.4 billion
  • Federal courts, Department of Energy, federal road construction and maintenance, air traffic control, EPA, FEMA and flood insurance — $79 billion

The total: $175 billion

Under a different scenario, millions of Americans wouldn’t get their federal tax refunds, which costs the Treasury Department $85.5 billion, if the government elected to largely pay off all the other items in the debt lists.

The center adds that Congress would need to raise the debt ceiling by $1.1 trillion this year and by $1 trillion in 2014 to avert disaster.

—For more ways to save, spend, invest and borrow, visit MainStreet.com.

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