While the debt limit has taken a back seat to the "Fiscal Cliff" in this news cycle, it has the potential to hit consumers' wallets a lot sooner and a lot harder than any fiscal cliff. Most taxpayers receive all of their tax forms by the end of January and those expecting tax refunds generally send them in as soon as possible. This triggers huge deficits in February and March, which generally subside right around April 15th. In 2012, over $200B in refunds were sent to individuals and businesses, contributing heavily to a nearly $400B deficit over that two month period. This was paid for by drawing down cash from $160B to $40B and issuing $280B in new public debt.
And there lies the problem for 2013. As of 12/11/2012, we are $57B away from the $16.394T debt limit and had $38B cash in hand with a month and a half to go before tax refund payments are scheduled to start pouring out. Using last year as a guide, we will probably hit the debt ceiling and run out of cash right around 2/1/2013. It is likely that treasury can extend this a bit with their "extraordinary measures" games and trickery, but given the magnitude of the cash outflows involved, not for long. The bottom line is that unless the debt ceiling is increased, it will be impossible for tax refunds, or anything else, to be paid come mid-February.
The consequences of this are so vast, it is hard to believe we actually get that far. Pulling $200B of taxpayers' money out of the economy presents its own problems, but I'll let the economists take a swing at that one. The bigger issue is the possibility of infuriating 100 million taxpayers and depriving them of money that is rightfully theirs. The failure to pay tax refunds has the possibility to birth a political movement that would dwarf Occupy Wall Street and the Tea Party, or maybe even unite them. Note to self: "Increase allowances on W-4 and file taxes as early as possible this year."
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