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The Philadelphia Inquirer

May 2, 2002 Thursday CITY-D EDITION

SECTION: Pg. C02

U.S. government is running out of money and time;

It risks default soon when it hits its $5.95 trillion debt limit. Stopgap measure can delay the deadline.

The United States will once again face an unprecedented default on the national debt - this time in mid-May - unless Congress extends the government's authority to borrow, a request that has been mired in a political fight.

Treasury Secretary Paul O'Neill dodged a default in April by moving federal retirement funds into a non-interest-bearing account, freeing room for more borrowing.

Yesterday, the Treasury Department said the debt limit was expected to be hit in mid-May, earlier than the latter-June time frame that O'Neill laid out in an April 17 letter to congressional leaders. Treasury pushed the date forward because lower-than-expected income-tax payments are forcing the government to borrow $1 billion in the April-June quarter. That's a sharp reversal of earlier plans to actually retire $89 billion of the national debt in the quarter.

In fact, the government said yesterday there would be no more repurchases of Treasury securities in the current quarter. Moreover, it said it would sell $33 billion in Treasury notes next week - important to small investors who like the safety of government securities. This is the first time since 1995 that the government has needed to borrow in the April-June quarter, a quarter normally flush with cash from a flood of income-tax payments.

O'Neill has repeatedly asked Congress to boost the debt ceiling by $750 billion, but the request has become stuck in a political fight over the budget. The limit now stands at $5.95 trillion.

If the debt limit is not raised by mid-May, Treasury said, it can use a number of stopgap measures to stay under the debt limit and avoid a default. But those stopgaps will not help in the "latter half of June when regularly scheduled payments to Social Security and other government trust funds will require the Treasury to borrow beyond this additional, limited capacity," Treasury warned.

Without such juggling of funds, Treasury would not be able to borrow the money it needs to keep the government operating, including making payments on debt that is coming due.

If those payments are missed, the government would be technically in default on the $5.95 trillion national debt, something that has never happened.

Given that Treasury can take steps to maneuver around the debt limit and that Congress is sure to eventually raise the ceiling, economists said there was never a real danger of a default, which likely would touch off an economic crisis.

Budget experts predict the United States will record a budget deficit for the entire 2002 fiscal year, which has not happened since 1997. The federal fiscal year ends on Sept. 30.

The Bush administration has blamed the return of red ink on a recession that began in March 2001 and the costs of waging war in Afghanistan and battling terrorism at home. But Democrats blame the 10-year, $1.35 trillion tax cut that President Bush pushed through Congress last year.