If Congress refuses to raise the debt ceiling: A look at the consequences

Congress doesn’t have to raise the debt limit. But refusing to do so would have huge consequences for the economy and the Constitution.

If the debt ceiling is not raised, Congress would be left with $120 billion per month in red ink, forcing the administration to take a hatchet to government programs authorized by Congress.

The numbers make the $39.9 billion the White House and Republicans agreed to cut from 2011 spending last week seem like very small potatoes.

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In March alone, the Treasury Department borrowed $75.3 billion to keep the government running, more than the Pentagon’s outlays for that month.

It paid another $24.4 billion in interest on the debt in March, which by itself is more than the combined outlays that month for the departments of Commerce, the Interior, Energy, Homeland Security, Justice, State, Transportation and Education.

Talk about discretionary spending cuts.

For the first six months of the year, Treasury has borrowed $708.4 billion to keep paying the costs of running the government.

While the amount of bonds Treasury must sell each month varies greatly, estimates of the deficit suggest Treasury would be short about $120 billion per month to pay for the costs of defense, discretionary and mandatory spending if the $14.3 trillion debt ceiling isn’t raised.

Unless it is willing to force the shuttering of half the government — something that would be difficult for the president to do under the Constitution even if he wanted to — Congress is going to have to raise the debt ceiling.

“It’s these consequences that may lead Congress to move forward with lifting the debt limit,” said J.D. Foster, a senior fellow with the Heritage Foundation.

If the ceiling is hit, Treasury isn’t likely to stop paying interest to China and other holders of U.S. debt, since that would cause the U.S. to default.

Treasury Secretary Tim Geithner recently cited a Feb. 11 Congressional Research Service (CRS) report that said if the debt limit is reached, “federal spending would have to be decreased or federal revenues would have to be increased by a corresponding amount to cover the gap in what cannot be borrowed.”

CRS said the government had a few choices. It could eliminate all discretionary programs, cut nearly 70 percent of outlays for mandatory programs, increase revenue collection by two-thirds or take some combination of all three steps.

Lawmakers and the administration agree that a default should be avoided, since it could cause interest rates to rise sharply and home values to decline and would reduce retirement savings.

It would threaten an economic recovery that created more than 200,000 private-sector jobs last month.

Foster thinks the Congress will agree to raise the debt ceiling sometime before the July 4 recess, which is supposed to begin on June 24.

Geithner basically extended the deadline for Congress in an April 4 letter that said his agency could take extraordinary measures to temporarily postpone the date by which the U.S. would otherwise default on its loans. Geithner said this would buy enough time to keep the U.S. under the debt ceiling until July 8.

Geithner warned it would be impossible to cut spending or raise taxes to prevent the country from surpassing the debt ceiling.

“Because of the magnitude of past commitments by Congress, immediate cuts in spending or tax increases cannot make the necessary cash available,” he wrote. “And reductions in future spending commitments cannot supply the short-term cash needed.”

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No wonder Sen. John McCain (R-Ariz.) this week predicted the country would have to enact “draconian measures” to escape a fiscal meltdown.

Foster thinks Republicans will have leverage over Obama, since many centrist Democrats will not want to vote to raise the debt ceiling ahead of tough reelection races next year unless the measure is coupled with significant spending reductions.

Obama goes to battle armed with the bully pulpit, which he already is using to cast Republicans as irresponsible for not agreeing to a clean bill raising the debt ceiling, as past Congresses run by both parties have done.

In a little more than two months, the next real deadline will hit both sides, with much bigger stakes than last week’s near-government shutdown.