Failing to Suspend or Raise Debt Limit Would Have Wide-Ranging Effects

Were the nation to default on its legal obligations for the first time — which will occur if lawmakers don’t raise or suspend the debt limit in the coming days — that would have devastating consequences not only for financial markets and the economy but also for tens of millions of everyday Americans who count on federal services and benefits, for states that count on federal funding for a range of services, and for the businesses and non-profit organizations that do work for or receive funding from the federal government.

Both parties have supported raising the debt limit in recent years to avoid default. Under President Trump, Democrats joined Republicans to suspend the debt limit three times. Consequently, the decision of whether to raise or suspend the debt limit shouldn’t be a partisan one.

The Treasury Department estimates that, without a suspension or increase in the debt limit, it will run out of borrowing room sometime in October. If the government could no longer borrow to meet its obligations, it would need to impose a sharp, massive spending reduction of roughly $1.2 trillion just in fiscal year 2022.

The Treasury might make this reduction by delaying payments but, for the families, businesses, employees, and other entities that would be affected, receiving fewer payments than they are owed — such as a Social Security beneficiary receiving fewer than 12 monthly Social Security payments, a member of the military receiving fewer than 26 paychecks in a year, or a supplier having only some of its invoices paid — would still amount to a cut. Although some have suggested that the Treasury could prioritize certain payments and delay others further, the Treasury has consistently stated that its payment systems are unable to prioritize payments in that manner.

These payment reductions would have wide-ranging impacts across the country, leaving some households, businesses, and nonprofits unable to pay their bills while they wait for payments that the federal government legally owes them. And cuts in federal grants-in-aid would seriously strain the budgets of state and local governments, as federal grants account for nearly a third of state spending nationally, and states rely on the timely provision of federal aid to deliver on their own obligations. Here are some examples:

• 65 million Social Security beneficiaries could see their benefits delayed, at least for short periods. Although Social Security has its own trust fund, the Treasury’s inability to prioritize payments could prevent paying benefits on time.
• 6 million veterans and survivors of veterans receiving compensation or pensions and 22 million low-income households receiving SNAP benefits could have their benefits held up for weeks or months, even as they need to pay their bills and put food on the table.
• 1.4 million military service members and 3 million federal civilian employees could see their pay delayed — for weeks and months, not just a few days.
• Funding for Medicaid, the largest source of federal aid to states, and public health would be at risk of cuts, despite the critical need for health care during the pandemic. In April, 82 million individuals were enrolled in Medicaid and the Children’s Health Insurance Program.
• Head Start agencies could see their funding delayed for lengthy periods, which would leave them without the money to pay their staff and possibly force them to shut down.
• Highway contractors might not be paid promptly, which would make it hard for them to buy construction materials, pay their workers, and complete their projects.
• Companies that clean federal offices, provide federal agencies with computers, paper, and other supplies, or sell equipment to the military could all see their payments for the services, supplies, and equipment they provided held up for significant periods, making it hard for these companies to meet payroll and pay their suppliers.
• Funding to states for K-12 education and child care could be delayed for lengthy periods. This could mean funding shortfalls in school districts around the country, and it could mean that child care assistance programs run short of funds, leaving child care providers — often small businesses and nonprofits — unable to pay rent or their staff.
• Disaster aid in response to recent hurricanes, floods, fires, and other natural disasters could be delayed, leaving communities without desperately needed assistance.
• Reductions in agricultural commodity programs and crop insurance would weaken the farm safety net and leave farmers more exposed to the risks of low prices and poor harvests.
• Doctors could see payments for the care they provide to Medicare patients delayed for weeks or months, making it hard for them to pay their staff and stay in business.
• Housing assistance payments could become badly delayed, with missed payments over the next year, even though millions of families continue to report that they are not caught up on their rent or mortgage payments. Now that the federal eviction moratorium has expired, the consequences of evictions alone could be severe.

These are just a few examples of what would happen were the federal government to default. If the government’s inability to borrow were brief, some programs and payees might escape relatively unscathed, depending on payment schedules. If the debt limit crisis persisted, however, every federal program and activity would be at risk of substantial reductions or delays in spending.