Does Extra Tax Revenue Give Debt Deal More Time?

Zachary A. Goldfarb of the Washington Post talks with Steve Inskeep about the possibility that the U.S. government may have extra time to negotiate a deal to raise the debt ceiling because of higher-than-expected daily tax receipts. The deadline for Congress to raise the limit is Aug. 2.

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STEVE INSKEEP, host:

President Obama stated it clearly, and his Treasury Department backs him up. The federal government says it will run short of money to pay its bills on August 2nd, one week from today, barring a deal to raise the federal debt limit.

But some financial firms say there could be a little more time to raise the debt ceiling. Zachary Goldfarb's story is in the Washington Post this morning, and he's on the line.

Welcome to the program.

Mr. ZACHARY GOLDFARB (Journalist): Thanks. Good to be here.

INSKEEP: What makes this a moveable date?

Mr. GOLDFARB: Well, we might have a little bit of breathing room, mainly because tax revenues in the month of July have been a bit higher than had been anticipated. And so a number of financial analysts are saying that Treasury can probably manage for at least a few more days, if not a few more weeks, before failing to meet obligations. But again, this is just a little bit of breathing room, and doesn't remove urgency from the need to come up with some sort of longer-term deal.

INSKEEP: That's - it's useful, though, to hear this information, because it reminds us what the problem would be. It's a cash flow problem, as you'd put it, right? Because there would be money coming in. The question is how much, and whether it's enough to pay any given set of bills on any given day.

Mr. GOLDFARB: That's exactly right. So tax revenues - which is, essentially, people paying their taxes late, you know, getting extensions - are coming in every day. And they're enough for about 60 percent of government spending. But government spending makes up a huge part of the economy. And so even a 40 percent reduction would have a huge impact on our economy, would cut about 10 percent out of our economy and lead, probably, to a second recession if the debt ceiling wasn't raised, you know, within a few weeks, at the latest.

So there's a little bit of breathing room, but the cash flow will run very tight. We don't know exactly what tax revenues will be, and we don't know how the markets will respond.

INSKEEP: Well, there is another point, because, of course, there are some lawmakers who are questioning whether blowing past the debt deadline is really even a very big deal. It sounds, from what you're saying, that the financial experts, the people on Wall Street that you're talking with do still think it's a big deal, even though it's hard to pin down the exact date of catastrophe.

Mr. GOLDFARB: Exactly. So people on Wall Street are saying, yes, you must raise the debt ceiling, because there's a lot of things that rely on Treasury and the financial mechanisms that Treasury bonds are issued by. And the whole markets really rely on that. So yes, you need to do it. If it takes an extra day or two or three, that might not be a problem. It might be a problem.

A big date is August 4th, where the Treasury is set to sell or pay back $100 billion in bonds and then reissue $100 billion in bonds. And we have no idea how the markets will respond.

People think that there's nothing better than the U.S. right now, so people might still show up for those auctions. But you don't know for sure.

INSKEEP: Well, that's the question. You've got trillions of dollars of U.S. bonds outstanding, and billions, many billions coming due on that day and on many other days. Is there any possible, even a remotely plausible - alternative for where the Chinese are anybody else who has a lot of money could put their cash?

Mr. GOLDFARB: It's really hard to see one. I mean, you could say Europe one day, but Europe's financial problems are just as bad, if not significantly worse than the United States. You could say Japan one day, but Japan is also on a very difficult fiscal path. So there really isn't a good alternative.

It's kind of being, like, president of the United States. You have a good - you have a job that can often be very difficult, but he's not going to quit it. So China and other major investors don't really have another good option.

INSKEEP: Well, just in a couple of seconds, does that mean that even if the U.S. credit rating is lower, that that might not actually affect the interest rate very much on bonds? Because that interest rate is set in the market.

Mr. GOLDFARB: If one credit agency lowers down - lowers the rate, it may not have a big effect. But if that starts a chain reaction, it could have a big effect. So you don't want to start disturbing with - the credit rating of the United States.

INSKEEP: OK.

Mr. GOLDFARB: You don't know exactly what would happen. It's unprecedented.

INSKEEP: Zachary, got to stop you there. Mr. Goldfarb, thanks very much.

He's a reporter with the Washington Post.

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INSKEEP: This is NPR News.

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