Report: Treasury must cut spending 44 percent in default

New analysis by the Bipartisan Policy Center (BPC), which has been shared extensively with members of Congress, estimates that the Treasury Department would not be able to pay all its bills and would need to implement an immediate 44 percent cut in federal spending in the event the debt ceiling is exceeded. 

On an annualized basis, the cut in spending alone is a 10 percent cut in GDP, BPC scholar Jay Powell told reporters.

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The report released Tuesday concludes that Treasury would not be able to pay all its bills between Aug. 2 and “probably” not later than Aug. 9 if the debt ceiling is not increased.

"Handling all payments for important and popular programs" including entitlements and military pay will "quickly become impossible," it says.

The day-by-day picture of default shows a 44 percent cut in federal spending. It concludes that the daily inflows of revenue and outflows of obligations are “lumpy” and that it would be difficult for Treasury to prioritize 80 million different payments. For the month of August, the deficit from Aug. 3 to Aug. 31 would be $134 billion.

"If you are going to be cutting 44 percent of the budget overnight, you are going to be cutting many popular programs, there is no way to avoid it," Powell told reporters Tuesday. 

"The result would be chaotic," he said, noting the current inability of Treasury computers to handle the payments. 

Powell said that the report shows prioritization is far worse than a government shutdown for the economy.

“There is no way to avoid really serious pain,” Powell said.

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In one scenario, if the administration tries to protect Social Security, Medicare, Medicaid, defense contracts and unemployment insurance, then no military pay, tax refunds, federal civilian pay or welfare payments could be made that month.

Protecting the social safety net, including Pell Grants and welfare, along with the big entitlement programs, still means that no federal workers would be paid in August and no tax refunds would be issued.

In both scenarios, the entire budgets of the Justice, Labor, Energy, Interior, Health and Human Services and Commerce departments are zeroed out, as are the budgets of NASA, Environmental Protection Agency, Federal Transit Administration and Federal Highway Administration.

The BPC does not see it likely there will be an actual default on bond payments. BPC head Jason Grumet said this is because the relative harm of an actual bond default is the greater evil, so it is less likely than the massive cut in spending.

Grumet said the study shows there is no scenario where only Washington is punished — it's the American people who are punished.