If we hit the debt ceiling: Default is unlikely, recession is certain

Reaching the debt ceiling, which we will do at least by the end of October, means no more new government borrowing until it is raised. But not borrowing does not mean defaulting on interest payments on government debt. Much like approaching your credit card limit has different consequences from missing a payment, hitting the debt ceiling is not synonymous with defaulting on debt. Households prioritize outlays as borrowing limits are reached, paying mortgages or rents and perhaps minimum credit card payments, while curtailing more discretionary spending such as eating out and going on vacation. The US treasury will have to prioritize too.

Hitting the debt ceiling means that government spending gets cut dramatically, by about 20 percent under current conditions. The CBO projects the federal government will spend $3,602 billion in fiscal year 2014, $560 billion of which will be financed by borrowing, and $237 billion of which will be spent on meeting interest obligations. Without new borrowing and while continuing as it is required to do (pay interest on its debt), the federal government will have $797 billion (20 percent of $3,602 billion) less available to spend on non-interest obligations. If mandatory spending remains unaffected, the cuts would force discretionary spending to drop by 48 percent.