Debt Ceiling: Worst-Case Scenario

As I understand it, if the debt ceiling is not raised, the federal government cannot borrow any more money. That should mean it can only spend only what it raises in revenue. But what would that mean? Would the federal government have to default (stop making interest payments on its existing debt)? Would Social Security checks have to be cut? How big are the cuts we are talking about?

For budget numbers, I will use Office of Management and Budget estimates (see Table 1.1 for total revenue and Table 3.2 for spending by function and subfunction.). By the time the debt ceiling is reached, most of Fiscal Year 2011 will be behind us. FY 2012 starts October 1. So I will use FY 2012 numbers to guide this exercise.

OMB estimates FY 2012 revenues to be $2.6 trillion. So if the debt ceiling is not raised, the federal government would have to get by on that for the year. That is more than the federal government spent in any year prior to 2006.

But OMB estimates 2012 spending to be $3.7 trillion, or $1.1 trillion more than revenues then.  Somehow, spending would have to be "cut" (from the expected levels) by 29.5%.

To avoid default, interest payments would have to be made. OMB expects them to be $243 billion in 2012. That would leave $2.4 trillion for everything else.

If Social Security and Medicare are also untouched, that would leave $1.1 trillion for everything else.  That is, we could avoid default and pay seniors every cent they expect from Social Security and Medicare, and still have well over one trillion dollars left for everything else.

The trouble is OMB estimates everything else to cost $2.2 trillion. So to leave SS and Medicare untouched, and also not default, the rest of the 2012 budget would have to be cut by $1.1 trillion, or about 50%.

The elephant in the room is defense spending. We certainly don't want to stop paying our military men and women who are fighting wars. OMB estimates all spending on national defense to be $738 B in 2012. But less than $160 B of that is military pay. Let's say we leave military pay untouched, but cut overall defense spending to 2005 levels. That is a 33% cut. Maybe we could find savings by removing bases and troops from Japan, Korea, Germany and elsewhere around the world, especially since ground wars in Asia, Africa and the Middle East have been ruled out.

Here is a shot at an overall spending budget, using OMB's categories, that meets the $2.6 trillion target to match revenues. (Most spending amounts in the right-hand column fall into one of three categories: untouched from OMB's 2012 estimate, zeroed out, or matching the minimum year's spending since 2005. Exceptions are described in the footnotes.)

Federal Government Spending (millions of dollars)

Spending category

FY 2005 Actual

OMB's 2012 estimate

A balanced 2012 budget

National Defense




International Affairs




General Science, Space and Technology








Natural Resources and Environment








Commerce and Housing Credit








Community and Regional Development




Education, Training, Employment, and Social Services




Health (excluding Medicare)








Income Security




Social Security




Veterans Benefits and Services




Admin. of Justice




General Government




Net Interest








Undistributed Offsetting Receipts




Total Outlays




*2005 level, but without foreign aid

**Disaster relief only

***Retirement, disability and unemployment only

****Retains prison spending, cuts other justice funding in half

The above budget is in rough balance. It would not increase debt, so the debt ceiling would not have to be raised or violated. It would also preserve the core functions of the federal government, and then some. Note some key features:

  • Net interest is paid in full. No default.
  • Social Security and Medicare are completely covered.
  • Federal retirement and disability programs would also be fully funded.
  • The men and women of the military would continue getting paid in full.
  • Federal prisons and correctional facilities would continue to operate.
  • Funds for disaster relief are preserved.
  • General government would be funded enough to keep operating. That includes the courts, legislative functions, the executive branch, and foreign affairs.
  • There is still funding for infrastructure, science, agriculture, etc.

Of course, deep and painful cuts would have to come from somewhere.

Education spending is eliminated in the above budget. But note that the federal government accounts for less than 10% of total public education spending. Public schools would have to survive on the 90% of planned budgets that come from state and local governments.  But they also would be relieved of federal mandates and rules.  Would that be so bad?   The Dept. of Education did not even exist prior to 1980; it was given to us by President Jimmy Carter.  We lived without it before; we can live without it now.

Energy spending is also zeroed out in the above budget. But net spending on energy was below $1B in each year from 1999 through 2008. In some years, the federal government made money in energy. The recent explosion in energy spending has come entirely since Obama entered office and started so many "green" initiatives. The Dept. of Energy is another gift from Jimmy Carter. We have learned we can live without this spending.

The above budget also eliminates foreign aid, housing assistance, food and nutrition assistance, other income security spending, community development and area and regional development.

The above budget reduces most of the other spending areas back to 2005 levels. In some cases, like federal law enforcement (e.g., Drug Enforcement Agency, Bureau of Alcohol, Tobacco and Firearms), the cuts are even deeper. (But full funding is retained for federal correctional activities.)

The above exercise was not a statement of some kind of preferred budget. It was simply an exercise to see how bad it would be to live within the current debt ceiling. And the arithmetic says it is possible. Not only is it possible, but it could be done without defaulting on the debt and without touching the entitlement programs of Social Security and Medicare. Feel free to look at the numbers and arrange to your taste. There are many ways to cut 30% from projected spending.

In round numbers, the federal government would have to live on what it did in 2005. It would not have to be the end of the world. It certainly would not have to mean default. In fact, it is disingenuous to conflate not raising the debt ceiling with defaulting on sovereign debt.

Personally, I think a lot of areas could use some cutting. Maybe we fiscal conservatives should not let this crisis go to waste. Now could be a great time to get rid of the Departments of Education and Energy and virtually eliminate their budgets. Now could be a great time to throttle back on the intrusive police powers of the DEA and BATF. Now could be a great time to get the federal government out of market manipulation in housing and other "commerce", and end a lot of crony capitalism and corruption by taking some piggy banks away from bureaucrats.

The trouble is that the decisions on where to cut would come from the Treasury Secretary and ultimately President Obama. At least that is how I understand the process, which is fraught with legal and constitutional uncertainties.

That is, the real danger is not in the debt ceiling itself, but in giving Obama the power to cut $1.1 trillion however he pleases. Obama could very well decide to not make interest payments, thus defaulting. He could decide to not pay our military men and women. He could decide to short-change seniors dependent on government pensions. In short, he probably could bring about financial Armageddon with a few strokes of his autopen.

And, of course, he will blame it on those evil Republicans who voted No on raising the debt ceiling.

And there's the rub. Bad things are going to happen in any case. The choice is among bad, worse and Greece. But thanks to the 2010 elections, Obama, the Democrats and the mainstream media (but I repeat myself) have someone to blame it all on: the House Republicans (and the crazy Tea Party nuts who control them).

This is no longer a budgetary or actuarial exercise. It is a PR exercise and a Blame Game. Then again, what's new?

Randall Hoven can be contacted at or via his web site,

If you experience technical problems, please write to