Debt Default Could Cost Taxpayers Billions

A U.S. government default on its debts would be a “dangerous gamble” that could easily cost taxpayers billions of dollars, the head of the Congressional Budget Office said today.
Doug Elmendorf told reporters that if the investors who buy federal debt begin demanding even modestly higher interest rates, to compensate for additional risk, it could quickly add more than $100 billion to the interest payments the government must make on its debt.
“It is a dangerous gamble because any government that has borrowed as much as ours has borrowed, and will need to borrow as ours will need to borrow, cannot take the views of its creditors lightly,” Elmendorf said today at a breakfast in Washington sponsored by the Christian Science Monitor. “Even a small increase in the perceived risk of Treasury securities would be very expensive for the country.”
If interest rates increased by 10 basis points, it would add $130 billion to interest payments over the next 10 years, Elmendorf said.
A bipartisan group of lawmakers is set to meet again today behind closed doors to hash out a deficit-reduction plan ahead of an Aug. 2 deadline to raise the $14.3 trillion debt ceiling. The group, led by Vice President Joe Biden, is set to meet three times this week as lawmakers pick up the pace of negotiations. Elmendorf wouldn’t say whether his agency is examining proposals being considered by the group.
The economic impact of any deficit-reduction plan will depend in part on how quickly changes are phased in, Elmendorf said, saying that if lawmakers cut too much too soon, it could damage the recovery.
“We think that cuts in government spending or increasing taxes in the next few years would reduce economic activity and employment relative to what would otherwise occur,” Elmendorf said. “At the same time, we think that reductions in government spending or increases in taxes later in the decade would hold down interest rates and increase confidence today in a way that would increase output and employment. That may sound like a contradiction, but it is not.”