Raise the debt limit -- or cut $738 billion

By Jeanne Sahadi, senior writer


NEW YORK (CNNMoney) -- Want to avoid raising the county's debt ceiling? It could be harder than anyone thinks.

The country would need to cut spending or raise taxes by as much as $738 billion over just 6 months, according to a report from the Congressional Research Service. That's how much it would otherwise need to borrow to pay all its bills for the rest of the year.

The Treasury now estimates that U.S. borrowing could hit its legal debt limit of $14.294 trillion between early April and the end of May.

What does raising $738 billion in 6 months really mean? The federal government could:

  • Eliminate all discretionary spending, including defense, and then look for another $50 billion of change in the sofa OR
  • Cut nearly 70% of outlays for mandatory programs like Medicare and Social Security OR
  • Increase tax revenue by nearly two-thirds OR
  • Some combination of the above.

And that's just for the rest of this fiscal year.

More spending cuts and tax hikes would be needed to meet U.S. obligations in 2012 and beyond if the limit isn't raised, the CRS report said.

Some conservative lawmakers have said they won't vote for an increase in the debt ceiling unless Congress agrees to a significant spending-reduction plan.

No one wants financial markets to lose confidence in U.S. creditworthiness. But there is disagreement over just what might shake that confidence and what constitutes default.

Senator Pat Toomey, a conservative Republican from Pennsylvania, has introduced a bill that would require the Treasury to use incoming tax revenue to pay bondholders' interest and principal before any other obligation is met.

That would keep the country out of default, Toomey believes, even if it likely means delaying payments to the federal government's vendors -- or "the guys who mow the lawn around the Mall" as he puts it.

"The market knows the difference between delaying a payment to a vendor and defaulting on our Treasuries," Toomey said at a Senate Budget hearing on Thursday.

The Treasury, by contrast, asserts that failure to pay any legal obligation of the United States could be perceived as default and upset markets.

Given how quickly nervousness can spread in markets and how damaging it would be to the U.S. economy if that happened, Treasury Secretary Timothy Geithner would rather Congress play it safe than sorry.

"I would caution everybody against taking any risk that Congress does not act to increase the limit within the time frame we need. We cannot afford to have the market lose any confidence ... That would cause grave damage to the expansion under way and we can't afford to take that risk," he said in response to Toomey's comments.

Failure to raise the debt ceiling is often incorrectly associated with the risk of a government shutdown.

In fact, a shutdown occurs only if lawmakers fail to appropriate money for federal agencies and programs. Just how much should be appropriated for the rest of this year is the debate currently consuming Congress, since a stop-gap funding measure that's kept the government open expires on March 4.

So the threat of a shutdown is still in play. House Speaker John Boehner said Thursday the House won't pass a budget for the remainder of the year that doesn't cut spending and that he wouldn't support a series of short-term band-aid measures that keep funding at 2010 levels until a deal is reached. To top of page

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