Congress Having Difficulty Cutting Spending In Debt Ceiling Debate

The debate over raising the debt ceiling is now focusing on an important issue the rating agencies have highlighted, i.e., the deficit itself and the level of the governments debt. The difficulty some members of Congress are having has to deal with the apparent lack of cuts in the early years of both Reid and Boehner's agreement. As an example, in the Boehner plan, the cuts are very little in 2012 and is very much back end loaded. The Reid plan is no better in reducing the deficit as well.

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From The Blog of HORAN Capital Advisors

Paraphrasing from a recent article on Zero Hedge's website, the CBO’s scoring of the Boehner budget proposal comes to a deficit reduction of $851 billion from 2012-2021. However, this plan is heavily back end loaded and, on a net present value basis the reduction is only $50 billion. The current federal deficit is about $1.4 trillion this year and growing; hence, some members interest in Congress to focus on expenses. Every year that passes without addressing entitlements, the more painful the medicine might be.

It is becoming increasing likely the August 2nd deadline is not met. If that is the case, what is the impact on cash levels at the Treasury? It appears the Treasury has enough cash until 8/12 and could probably get to 8/15, an interest payment date. This is highlighted in a Reuters article this morning. The table assumes that the Treasury will be able to at least roll over maturing debt on August 4, 11 and 15. See below chart from Stone & McCarthy research.

From The Blog of HORAN Capital Advisors

Both plans are highly likely to lead to a lowering of the government's credit rating given the reduced focus on the deficit and debt level.


h/t: Zero Hedge