On Thursday, Treasury Secretary Jack Lew sent a letter to Congress updating lawmakers on the “extraordinary measures” that the Treasury is taking to continue paying the government’s bills and avoid default, in absence of Congressional action to raise the country’s $18 trillion debt limit. Lew also reiterated the Treasury Department’s projection that it will be able to meet all financial obligations until some time in late October, while continuing to maintain approximately $150 billion in cash reserves. That allows a safety buffer of approximately one week’s worth of government outlays to prevent a default.
At some point after late October, absent authorization to increase debt and borrow more to cover annual deficit spending, the government would not be able to pay all of its bills.
“The government is like a family in that you operate based on your income,” says Stan Collender, a budget analyst with Qorvis MSLGROUP in Washington, D.C. “What Secretary Lew is saying is, expenses will exceed the amount of cash we have at that particular moment. Until then, we’ll have enough cash to be able to meet our bills, to pay all our expenses.”
The family budget analogy isn’t adequate to fully capture the complexity of federal budgeting, says Alice Rivlin, a fellow at the Brookings Institution, the former head of the Office of Management and Budget and former vice-chair of the Federal Reserve Board of Governors.
“The large number of bills and the large number of sources from which the government gets revenue make it more complicated than the family budget,” Rivlin says. “Generally, the family knows that the rent is due on the first of January.”
While it is true that government has to make payroll for federal workers and the military, and get Social Security checks and other entitlements out on time — just like a family making rent on the first of the month — a lot of the government’s bills aren’t predictable in any precise way. And they can be large enough to make a dent in the government’s balance sheet —for instance, to pay for an aircraft carrier or a new bridge, or to provide relief for a major hurricane.
Incoming revenue is also variable and unpredictable. Many tax payments by individuals and businesses are estimated — one such quarterly payment is due in mid-September. And in any given week, people might unexpectedly work fewer hours, depressing payroll tax collections.
Jim Capretta was an associate director in the White House Office of Management and Budget in the early 2000s, and is now a fellow at the American Enterprise Institute. “It’s a lumpy process,” he says, using the term-of-art in budget-policy circles. “There are big payments that go out and big sums that come in.”
And at some point starting in late October, that balance could slip into the red enough to blow through the Treasury Department’s intended $150 billion cash reserves and cause a default.