On March 16, 2017, the debt limit was reinstated from its current suspension, and the Treasury Department will be forced to implement its so-called “extraordinary measures” to continue meeting all of the federal government’s financial obligations. BPC’s updated projections show that, absent legislative action, those measures and the cash they generate will only last until October or November 2017. The day those measures are exhausted and Treasury runs out of cash on hand, known as the “X Date,” the federal government would no longer be able to pay its bills in full and on time.
The Congressional Budget Office (CBO) in its own projection similarly estimates that the X Date will most likely arrive in fall 2017.
All of these projections carry significant uncertainty, due to the unpredictable nature of the federal government’s cash flows. Moreover, major changes in fiscal policy or economic conditions could impact the timing of the “X Date.”
For basics of the debt limit and extraordinary measures, see The Debt Limit at 100: What you need to know and Extraordinary Measures, Simplified
The State of Play
Similar to 2015, the tax-season timing of the debt limit reinstatement allows extraordinary measures to last longer than other occasions when the federal government has bumped up against the debt limit. By mid-March most tax-refunds have typically been paid out, while April is among the strongest financial months of the year for the federal government, as revenue flows into Treasury’s coffers from individual tax returns. The March reinstatement also allows Treasury to take advantage of certain extraordinary measures that only become available in June and September.
While extraordinary measures will provide Treasury with necessary breathing room, operating at the debt limit carries costs. Many Treasury employees spend time (that would normally be spent on other work) executing extraordinary measures and ensuring that the debt does not exceed its limit on a day-to-day basis. In addition, delayed action on the debt limit can increase Treasury’s borrowing costs. The Government Accountability Office estimated that the debt limit impasse of 2013 cost the federal government $38 million to $70 million in that year alone.
Fitting in action on the debt limit will be difficult with a congressional calendar already packed with deadlines. Fiscal Year (FY) 2017 appropriations for the federal government are scheduled to run out on April 28. Without appropriations, the government would undergo a partial shutdown, ceasing operations and closing everything deemed “non-essential,” such as national parks. While finalizing FY2017 funding, Congress will also need to review and conduct hearings on the new administration’s FY2018 budget. Beyond just the budget, President Trump and congressional leaders have set out an ambitious legislative agenda, planning to repeal and replace the Patient Protection and Affordable Care Act, pass large-scale tax reform, and enact a large infrastructure package all within the next year. Though Treasury Secretary Steven Mnuchin sent a letter urging Congress to raise the debt limit as soon as possible, it is not yet clear how addressing the debt limit fits into lawmakers’ broader goals.
How does BPC project the “X Date”?
Projections of the “X Date” rely on three main factors: Treasury’s cash on hand, the amount of extraordinary measures available, and the Treasury Department’s daily cash flows. Each of these areas has its own nuances that need to be accounted for in estimates of the “X Date.”
- Cash on hand: Treasury has a cash account that is used to pay the government’s bills. According to the legislation that suspended the debt limit in October 2015, this account must be limited to approximately $23 billion when the debt limit is reinstated on March 16. To meet that requirement, Treasury has dramatically spent down its balance from the beginning of 2017, when that account held $370 billion. Interestingly, the fact that Treasury has largely been meeting its obligations out of these reserves (rather than additional borrowing) explains why the total government debt subject to limit has not yet exceeded the much-anticipated $20 trillion level.
- Extraordinary measures: Treasury is allowed to use certain accounting maneuvers when operating at the debt limit, some of which (according to Treasury) provide “headroom” under the limit, while others provide accounting flexibility to make payments. We estimate that the three primary extraordinary measures will provide Treasury approximately $400 billion of headroom, helping to ensure that all government obligations continue to be paid in full and on time for several additional months.
- Treasury’s daily cash flows: Treasury cash flows are the most uncertain variable in our projections and are highly volatile on a day-to-day basis. Because the government is running an annual deficit, the amount of cash and extraordinary measures winds down over time. But the trends vary significantly from month to month. Days of large scheduled payments, such as October 2, are at higher risk of being the “X Date.”
Due to uncertainties in Treasury’s daily cash flows it is impossible to predict a specific day on which Treasury will run out of cash and extraordinary measures. To deal with this uncertainty, we provide an “X Date” range, a window that will narrow as additional data become available over the course of the year.
BPC’s projections are based on current policy and historic trends and are subject to substantial uncertainty. Consequently, they could shift due to dramatic changes in fiscal policy or economic conditions. Heightened volatility around tax revenues this year make our estimates particularly uncertain. We will update these projections when appropriate.
Download the PowerPoint: The Debt Limit: 100 Years and Counting