Latest / The Fiscal Policy Podcast with Fexingo: Government Budgets, Stimulus, and Public Spending / How One Billion Dollars Vanishes in Government Payment Float
Transcript
- Lucas: So there's this number that's been stuck in my head since I read a Government Accountability Office report from early this year. The US Treasury earned about one point two billion dollars last year just from the float — the gap between when the government owes a bill and when it actually pays. Luna: One point two billion. That's not small change. And that's the government earning that, not the businesses waiting on payment? Lucas: Exactly. The federal government holds roughly a hundred and fifty billion dollars in unpaid invoices on any given day. That money sits in the Treasury's general account, earning interest, instead of sitting in a small business's checking account. The government is essentially getting an interest-free loan from its own vendors. Luna: I mean, I know there are laws about this. The Prompt Payment Act, right? Lucas: Right. The Prompt Payment Act of 1982 says the government should pay within 30 days, and if it doesn't, it has to pay interest penalties. But here's the thing — the law has so many exceptions and loopholes that the average payment time for small businesses is still 47 days. For large contractors, it's often even longer. Luna: So the penalties don't actually create enough pressure to change behavior? Lucas: They do for some agencies, but the penalties are relatively low — they're tied to the Treasury's interest rate, which has been around 5 percent lately. But many small businesses don't even file for the penalty because the paperwork is too burdensome. The GAO found that less than 10 percent of eligible late payments actually triggered a penalty claim. Luna: So the government is effectively counting on businesses not bothering to claim what they're owed. Lucas: That's one way to put it. And it gets more interesting when you look at who benefits from the status quo. Large vendors — think defense contractors, IT services firms — they actually prefer slower payment terms in some cases. Because they can set up their own cash management systems where they earn interest on the float on their side too. They negotiate longer payment terms and then use commercial paper or factoring to bridge the gap. Luna: So the big guys are fine with it, and the little guys get squeezed. That's a pretty regressive outcome from a system that's supposed to be neutral. Lucas: Exactly. And other countries have done better. The UK government mandated payment within 30 days for all public contracts back in 2018, and they actually enforce it with automatic penalties. Australia went to 20 days for small business suppliers. The US hasn't moved. Luna: Is there any movement now? I know there was a bill introduced last year — the Prompt Payment for Small Business Act, something like that? Lucas: There was. It would have required the government to pay small business subcontractors within 15 days. It passed the House but stalled in the Senate. The opposition came from some large prime contractors who argued it would disrupt their cash flow management. So the one-point-two billion dollar question is: whose cash flow matters more? Luna: And we're not even talking about state and local governments, which often have even worse payment times. Lucas: Right. Some states take 60 to 90 days to pay vendors. And unlike the federal government, they don't always have a Prompt Payment Act with interest penalties. So the float issue is even more pronounced there. Luna: What would happen if the government just paid in 15 days across the board? The Treasury would lose that one point two billion in interest income, sure, but private businesses would gain that money — and probably more, because they'd have lower financing costs. Lucas: The net effect is almost certainly positive for the economy. Small businesses typically have much higher cost of capital than the government. The government borrows at around 4 to 5 percent. A small business might pay 10 to 15 percent on a line of credit. So shifting the float from the government to small businesses is like moving money from a low-return account to a high-return one. Luna: It's a hidden tax, basically. The government is taxing vendors by delaying payment. Lucas: That's exactly the framing the GAO used in their 2025 report. They called it an implicit tax on the private sector. And they estimated the total cost to the economy — including lost investment opportunities, higher borrowing costs, and the administrative burden of chasing payments — at somewhere between three and five billion dollars annually. Luna: That's not nothing. For context, that's more than the budget of the Small Business Administration itself. Lucas: Right. The SBA's budget is about nine hundred million. So the payment float costs small businesses more than the entire agency that's supposed to help them. Luna: And the fix seems straightforward — just change the payment terms and enforce them. So why hasn't it happened? Lucas: Part of it is institutional inertia. Government payment systems are old — many run on COBOL code from the 1970s. Changing them is expensive and risky. The Treasury's payment system, called G-Invoicing, was supposed to modernize things but has been delayed and over budget. And there's also the political economy: the one-point-two billion the Treasury earns goes into the general fund, so it reduces the deficit on paper. Paying faster would increase the deficit — at least in the short term. Luna: So the government has a perverse incentive to drag its feet. Lucas: Exactly. Every day the government delays payment, it earns a little more interest. And no single lawmaker gets blamed for the delay because it's diffused across thousands of contracts and agencies. Luna: It reminds me of the story about how the government pays more for printer ink than blood — it's one of those weird bureaucratic inefficiencies that just persists because no one has a direct incentive to fix it. Lucas: And like that ink example, the fix is simple on paper but hard in practice. You'd need the Office of Management and Budget to set a firm 15-day payment target, the Treasury to modernize its payment systems, and Congress to close the loopholes in the Prompt Payment Act. None of those things is politically sexy. Luna: But the cumulative effect would be enormous. Faster payments could be a huge stimulus — not through new spending, but just by letting businesses keep more of their own cash. Lucas: Yeah, and speaking of keeping things going, if walking through the economy with us has made something click — or even just felt worth your time — there's a small way to keep this whole thing ad-free. It's buy me a coffee dot com slash fexingo. Luna: Yeah, it's literally a coffee. That link helps us keep the conversation going without any sponsors or interruptions. Lucas: Anyway, back to the float. One of the most interesting angles I came across is how some states are starting to experiment with early payment programs. Utah, for example, now offers a small discount to the state if vendors want to get paid in 10 days instead of 30. Luna: Like a reverse prompt payment discount. The state gets a 0.5 percent discount, and the vendor gets their cash fast. Lucas: Exactly. And it's voluntary. So vendors who need cash flow can opt in, and the state saves a little money. It's a creative way to address the problem without a big legislative fight. Luna: What's the uptake been like? Lucas: Modest so far — about 12 percent of vendors have opted in. The state saved about two million dollars last year. But the real benefit is that vendors who use it report lower borrowing costs and fewer late payment penalties from their own suppliers. Luna: So it's a small experiment that could scale. If more states and the federal government did something similar, we're talking about billions. Lucas: Right. And there's precedent in the private sector. Large companies like Procter and Gamble and Walmart have moved to dynamic discounting — offering suppliers faster payment in exchange for a small discount. It's standard practice in supply chain finance. The government is just late to the party. Luna: Late and losing a billion dollars a year by being late. Lucas: That's the headline. The government earns one point two billion by paying late, but the economy loses three to five billion because of it. Fixing that mismatch seems like one of the most straightforward policy wins out there. Luna: It's the kind of thing that should be bipartisan. Faster payments, lower costs, less bureaucracy. Who's against that? Lucas: Well, the large contractors who benefit from the status quo. But that's a story for another episode.