Assets Available to Prevent Federal Default

February 11, 2013

As the national debt rapidly rises toward its current limit of $16.4 trillion, another debt ceiling debate looms in the future. The United States can neither default on its debt obligations nor raise the debt ceiling without implementing spending reforms, say Jason Fichtner and Veronique de Rugy, senior research fellows at the Mercatus Center.

  • It is irresponsible to signal to the international community that the United States would default on its debt obligations while it struggles through another debt ceiling debate.
  • Because the credit rating agencies have suggested that another debt ceiling debacle would force them to downgrade the U.S. credit rating, Fichtner and de Rugy echo credit rating agencies who desire credible medium-term deficit reduction plans to accompany any increase in the debt limit.

Raising the debt ceiling and reducing the deficit are only temporary solutions to the real problem: out-of-control government spending over the last decade that has created the fiscal crisis. Instead of one-time cuts or debt limit raises, Fichtner and de Rugy advocate real institutional reforms like ratifying a constitutional amendment to limit spending, ending budget gimmickry and creative bookkeeping, instituting a cut-as-you-go system or mandating annual real spending caps.

Absent these substantial reforms, the government could actually not raise the debt ceiling through September 2013 and still avoid default by relying on temporary measures to pay interest on the debt.

  • The Congressional Budget Office expects the federal government to collect an estimated $2.6 trillion in tax revenue in fiscal year 2013, which would cover federal obligations to pay interest on the debt and cover Social Security, Medicare and Medicaid payments with money left offer.
  • Alternatively, the U.S. Treasury Department has authority to meet debt obligations by liquidating existing assets, including nonrestricted cash on hand, restricted cash and other monetary assets (such as gold and foreign currency), the remaining TARP assets and the Federal Reserve.
  • The Department of Transportation could also raid a variety of trust funds.

To avoid drastic measures like raiding trust funds, lawmakers should take tangible steps to reduce the long-term deficit before raising the debt ceiling.

Source: Jason Fichtner and Veronique de Rugy, "The Debt Ceiling: Assets Available to Prevent Default," Mercatus Center at George Mason University, January 2013.

 

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