What happens if President Obama and Congress don’t strike a debt deal? 
 
 On Aug. 3, the nation would find out, with Obama forced to make a set of extraordinarily difficult choices about what to pay or not pay. By then, the government’s savings account would be nearly empty and the president would be relying on daily tax revenue to pay the nation’s bills. 
 
 There wouldn’t be enough — in fact, there would be a $134 billion shortfall in August alone. 
 
 As Obama decided what to pay, he would choose among Social Security checks, salaries for members of the military and veterans, unemployment benefits, student loans, and many other government programs, according to administration officials and an independent analysis by a former senior Treasury Department official in the George H.W. Bush administration. 
 
 To protect the nation’s creditworthiness, Obama would have to balance those priorities with the imperative of making payments to investors in U.S. government bonds — ranging from domestic pension funds to the Chinese government. 
 
 “You can move the chess pieces around all you want,” said Jay Powell, a visiting scholar at the Bipartisan Policy Center and an author of the analysis. “You’re going to lose.” 
 
 For months, the president has been pressing Congress to raise the federal limit on borrowing, now at $14.3 trillion. Members of both parties have balked, saying they first want a plan to tame the growth of the debt. 
 
 On Wednesday, with negotiations over raising the debt ceiling hung up, Moody’s said it might downgrade the U.S. government’s top-of-the-line credit rating, which helps keep U.S. bonds the global gold standard, “given the rising possibility that the statutory debt limit will not be raised on a timely basis, leading to a default.” 
 
 Obama says he must reach an agreement by July 22 to get legislation through Congress and meet an Aug. 2 deadline, after which the Treasury Department projects it will no longer have enough money to pay for all U.S. obligations. Treasury Secretary Timothy F. Geithner has warned that a default would deal a severe blow to the economy. 
 
 Some skeptics in Congress and conservative economists say that Obama has overstated the risk of not raising the debt ceiling and that tax revenue could pay for up to 60 percent of government operations. 
 
 “You do not have to default and you don’t have to shut down the government if you choose not to,” said Peter Morici, an economist at the University of Maryland. If Congress raises the debt ceiling without a long-term plan for reducing the federal deficit, he added, “they’ll never solve the problem, and we’ll end up like Greece.” 
 
 Obama’s advisers have said that prioritizing some payments over others is impractical and would be chaotic. Money comes in and flows out at an inconsistent rate. 
 
 “You would have to make heinous choices about which bills you would pay,” White House press secretary Jay Carney said Wednesday. 
 
 On Wednesday night, several Republican leaders were briefed on the Bipartisan Policy Center report as concern grew in the party about the potential impact of not raising the debt ceiling. 
 
 According to the center’s analysis, the government would have to cut 44 percent of spending immediately. Through August, the government could afford Social Security, Medicare, Medicaid, defense contracts, unemployment insurance and payments to bondholders. 
 
 But then it would have to eliminate all other federal spending, including pay for veterans, members of the armed services and civil servants, as well as funding for Pell grants, special-education programs, the federal courts, law enforcement, national nuclear programs and housing assistance. 
 
 After the debt ceiling was breached, there would be no delay in the tough decisions. 
 
 On Aug. 3, the Treasury is set to receive about $12 billion in tax revenue — mainly from people paying their taxes late — and is slated to spend $32 billion, including sending out more than 25 million Social Security and disability checks at a cost of $23 billion, according to Powell’s analysis. 
 
 Obama could decide to pay half of the Social Security checks and ignore other bills coming due that day, which include $500 million in federal salaries and $1.4 billion in payments to defense contractors. 
 
 Or he could decide not to make any Social Security payments and instead hoard tax revenues to pay investors in U.S. bonds. A failure to pay those investors would severely destabilize the financial system, analysts say. (Some also argue that the Treasury could engage in a never-before-tried swap of government bonds that would allow it to pay for Social Security. But Treasury officials say it is highly unlikely to work and may not be legal.) 
 
 Aug. 4 could prove even more difficult. The government is slated to spend $10 billion and raise only $4 billion in revenue. 
 
 More worrisome for government officials is the $100 billion in Treasury bonds that come due on Aug. 4 and must be paid off. Ordinarily, Treasury would pay off those bonds and issue new bonds. 
 
 But if the debt ceiling isn’t increased, Treasury could run into trouble “rolling over” this debt. Ratings agencies are threatening to downgrade U.S. bonds if the debt ceiling isn’t raised. If the bonds are downgraded, many investors — such as retirement funds — can’t buy them. 
 
 As a result, there could be far fewer buyers of Treasury bonds and the U.S. government would have to pay much higher interest rates. 
 
 Government officials and analysts say a spike in rates would dramatically increase the cost of funding the government and lead to far higher interest rates on mortgages, credit cards and other types of debt. ||||| Washington and Wall Street increasingly see Oct. 31 as the drop-dead date for raising the $16.7 trillion debt ceiling. [WATCH VIDEO] 
 
 Treasury Secretary Jack Lew says the government would be left with just $30 billion in cash reserves to pay all its bills on Oct. 17, exhausting his agency’s ability to use “extraordinary measures” to keep the government’s bills paid. 
 
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 Experts say the government could easily run out of funds before the end of the month, and that it’s basically impossible to nail down a specific drop-dead date, since Treasury is accepting and sending out millions of payments on any given day. 
 
 “I have a very specific estimate, and it changes every day,” said Alec Phillips, an analyst at Goldman Sachs. “People think it’s more certain than it is.” 
 
 What is clear is that the Treasury has $67 billion in payments to Social Security and Medicare beneficiaries, as well as pay for active-duty members of the military and benefits for civil service and military retirees due Nov. 1, according to the Congressional Budget Office. 
 
 One day before that, the government is supposed to make a $6 billion interest payment on its bonds. 
 
 The Treasury clearly wouldn’t be able to make all of those payments on Nov. 1 unless Congress raises the debt ceiling. 
 
 “The one thing we know for sure is that by Nov. 1, they will be out of money,” said Phillips. 
 
 That would leave the Treasury in uncharted territory. 
 
 The U.S. government has never failed to raise its borrowing limit, and other than a brief computer glitch in 1979, there’s never been a U.S. default on its debt. 
 
 But the ongoing chatter about the “real” deadline for Congress to act is driving concern that Oct. 17 might not be treated as do-or-die time by lawmakers looking to extract a bit more leverage by pushing to the absolute brink. 
 
 “If everybody is discussing when the actual deadline is, it’s not necessarily a good sign for them reaching an agreement by the 17th,” said Phillips. 
 
 “It’s really just a guessing game,” said Shai Akabas, senior policy analyst at the Bipartisan Policy Center. “It’s how much of a risk you want to be taking with the U.S. economy or the world economy.” 
 
 Most observers expect the Treasury would try to pay U.S. bondholders in the event that it reached the end of the month with no increase in the debt ceiling. 
 
 The 14th Amendment states that the “validity of the public debt of the United States ... shall not be questioned.” 
 
 “It’s likely under any scenario, they would do everything possible to make sure the interest on the debt is paid,” Akabas said. 
 
 Despite the amendment, however, the Treasury Department argues it has no legal authority to decide which government payments to prioritize, and prioritization plans are unworkable under its existing systems. 
 
 The House has approved legislation that says the government should first pay bondholders, but that legislation has not been approved by the Senate, and the White House has threatened to veto it. 
 
 Not paying bondholders would upend markets by throwing into question what was thought to be the safest security on the planet — Treasury bonds. 
 
 The U.S. would face an immediate and severe downgrade, borrowing rates would spike across a host of financial products, and stock markets and consumer confidence could collapse, taking the economy down with it. 
 
 Even if bondholders are paid, stocks could crash, and the U.S. could see its credit rating downgraded if the debt ceiling is not raised, and a host of other government payments cannot be made. 
 
 “Prioritization is default by another name,” White House press secretary Jay Carney argued Monday. “If you pay some of your bills and not all of your bills, you’re in default on the bills that you didn’t pay.” 
 
 “You’ve got to pay all your bills; that’s how you maintain your credit worthiness,” he added. 
 
 Financial services industry executives also argue the effects of not raising the debt ceiling would be calamitous, even if there is not a technical default. 
 
 “How long do you continue to invest in the United States when you have deteriorating confidence; you see they’re missing bills,” said one financial services industry executive. “If we stop paying some of the things that we said we’ll pay, even if we’re still paying the interest on our debt, I still think people will look at us with a quizzical eye and say, ‘That’s a banana republic.’ ” 
 
 Erik Wasson contributed. ||||| WASHINGTON—The Obama administration believes congressional leaders must agree to a deficit-reduction deal by July 22 in order to raise the government's borrowing limit in time to avoid a default in early August, according to Democratic officials with knowledge of the negotiations. 
 
 The government needs a week or two to write and pass the necessary legislation and take the steps necessary to avoid missing a payment. "We're down to the wire," one official said. 
 
 President Barack Obama and Senate leaders have agreed on the outline of an agreement to cut federal spending by about $1 trillion over at least 10 years, but are deadlocked over whether to include some tax increases, as Democrats insist, or take them off the table, as Republicans want. The Senate agreed Thursday to cancel its planned recess next week to stay in town in pursuit of an agreement. Still, many disagree about what would happen if they don't reach a deal, and it is hard to know for certain because the federal government hasn't defaulted in modern times. 
 
 Some, including top officials at the Treasury Department and the Federal Reserve, say the consequences of failing to raise the $14.29 trillion debt limit by Aug. 2 would be catastrophic, with the U.S. government unable to meet all its financial obligations, interest rates soaring, thousands of businesses filing for bankruptcy and hundreds of thousands of people losing their jobs almost overnight. 
 
 "If we didn't pay our bills, it would plunge the United States not into a recession, not into the so-called double-dip recession, but into a full-blown depression," Senate Majority Leader Harry Reid (D., Nev.) said Thursday. 
 
 The International Monetary Fund said this week that failing to raise the ceiling would send "a severe shock to the economy and world financial markets." 
 
 But skeptics have said the impact is much less certain and would depend in large part on whether the White House could avoid defaulting on its debt by continuing to make interest payments to bondholders, such as China. The Obama "administration insists on pretending that...as soon as the first employee is furloughed there will be a catastrophic collapse of the markets because the world will see the U.S. government in default," said Sen. Pat Toomey (R., Pa.). "That's ridiculous." 
 
 White House officials emphasized this week that they wouldn't choose which payments to make and which to suspend if the debt ceiling isn't raised, with Treasury Secretary Timothy Geithner calling the idea "unwise, unworkable, unacceptably risky, and unfair to the American people." 
 
 The federal government hit the debt ceiling in May but has been able to keep operating through a series of emergency funding maneuvers. But Treasury officials say if the government cannot borrow more by Aug. 2, they won't have enough cash to pay all the government's bills. Many members of Congress say they won't vote to lift the debt cap without first reaching an agreement to reduce the federal deficit over the next decade. 
 
 Without a debt-ceiling increase, the Treasury would face several immediate challenges, with $23 billion in Social Security benefits checks due Aug. 3, $90 billion in government debt maturing Aug. 4, and more than $30 billion in interest payments due Aug. 15. 
 
 A key test would be whether Treasury would be able to replace $467 billion in existing debt that matures in August. Investors might shun the new debt as too risky or demand sky-high interest rates. "If they didn't increase the debt ceiling, then truly horrific things would happen both in financial markets and the economy over all," said David Kelly, chief market strategist at J.P. Morgan Funds. 
 
 The consequences would play out in two ways. First, experts believe some sort of "trigger" event would move stock and bond markets, either before or after Aug. 2. Such an event could occur if a rating agency downgraded U.S. government debt, as several have threatened to do in recent weeks. Because Treasury yields are a benchmark for other interest rates, borrowing costs could soar on mortgages, credit cards, business loans and other forms of credit, and send the stock market plummeting. 
 
 Moody's Investors Service said Wednesday if the federal government defaults on its debt, the firm would downgrade its ratings on the other debt linked to Treasurys, such as bonds issued by cities, towns, and large banks, immediately driving up their costs of borrowing. 
 
 The second event would begin Aug. 3, with an immediate and unprecedented drop in federal spending, as the government stopped making payments to Social Security beneficiaries, government workers, Pentagon contractors, and others. 
 
 One reason the consequences remain unclear is because the government would continue to collect taxes in August, giving the Treasury Department enough money to meet more than half its commitments. In August 2010, Treasury brought in $164 billion in revenue for the month, which covered roughly 65% of its spending. 
 
 But reducing federal spending by 44% could mean laying off one-third of the federal work force, said Jay Powell, a visiting scholar at the Bipartisan Policy Center and former top Treasury official during the George H.W. Bush administration. "That's 600,000 or 700,000 workers." 
 
 —Naftali Bendavid contributed to this article. 
 
 Write to Damian Paletta at damian.paletta@wsj.com
– If Washington doesn’t manage to raise the debt ceiling by Aug. 2, Tim Geithner’s going to have some angry people on his hands. That’s the date the Bipartisan Policy Center predicts the government will run out of money, leaving the US to pay its bills with incoming tax money. In August, that amounts to $172.4 billion in revenue to pay $306.7 billion in obligations, meaning someone—be it seniors, soldiers, the unemployed, or bondholders—will be getting shafted, the Washington Post observes. “You can move the chess pieces around all you want,” says the former Treasury official who ran the analysis. “You’re going to lose.” Paying for Social Security, Medicare, Medicaid, defense contracts, and unemployment, for example, would leave the government unable to pay courts, police, soldiers, veterans, and so on. At the same time, Treasury must pay bondholders, or its credit rating will drop—making future borrowing even costlier.