Posted January 3, 2013
Barring a debt limit increase, Treasury's extraordinary measures will run out sometime in February
UPDATE: Debt Limit Analysis, January 7, 2013
By Shai Akabas and Brian Collins
Given the New Year’s Day passage of a deal to cancel or delay most aspects of the fiscal cliff, some may be wondering if this package will significantly affect the current debt limit situation – particularly, the timing of the date after which the federal government can no longer pay all of its obligations in full and on time. The answer is no.
In late November, the Bipartisan Policy Center (BPC) produced the first part of its 2012-2013 debt limit analysis. That report projected that the debt limit would be reached in the last week of December 2012 and that Treasury would be able to generate approximately $197 billion of additional cash through so-called “extraordinary measures” to continue paying the obligations of the federal government without exceeding the debt limit, currently set at $16.394 trillion. Eventually, if the limit is not increased, extraordinary measures would be exhausted and there would be a date after which the federal government could not fulfill all of its financial obligations. BPC refers to this as the “X date,” and projected in its initial report that this would likely fall sometime in February 2013, but acknowledged that there were many “wild cards” at the time that prevented certainty about that frame or a more precise estimate.
On December 26, Secretary Geithner sent a letter to congressional leaders indicating that the debt limit would be reached on December 31, 2012, and that extraordinary measures would “create approximately $200 billion in headroom under the debt limit.” At the time, Treasury declined to provide an estimate of the duration of the extraordinary measures, citing the uncertainty surrounding a variety of expiring tax provisions and the pending automatic sequestration cuts.
With resolution of the fiscal cliff, there is now greater clarity about some of the “wild cards,” and sufficient information to produce a more precise projection of the X Date. BPC is currently updating its calculations to incorporate the latest economic conditions – which show somewhat strengthening federal government revenues – and the end-of-month government financial data of December 2012. Next week, BPC will release the second part of its debt limit analysis with an estimate of a more specific window for reaching the X date along with detailed projections of daily operating cash flows for the relevant period.
Why BPC’s Estimate Was Not Significantly Impacted by the Fiscal Cliff Deal
To produce its November estimate that extraordinary measures would be exhausted sometime in February, BPC made several assumptions, including: tax withholding tables would remain unchanged (either tax rates are extended or expire but do not go into immediate effect because the Treasury Secretary does not adjust withholding rates), sequestration would not go into effect, the Alternative Minimum Tax (AMT) would be patched, enhanced unemployment benefits would end, Medicare payments to physicians would be frozen at 2012 levels (the “doc fix”), and the payroll tax holiday would be allowed to expire as scheduled. Most of these assumptions turned out to be correct. In enacting the American Taxpayer Relief Act of 2012, Congress extended all of the Bush tax cuts except those for very high earners, delayed automatic sequestration cuts for two months, permanently indexed the AMT for inflation, extended the current enhanced unemployment insurance benefit for one year, passed a one year extension of current payment rates for Medicare physicians, and did not extend the two-percentage point payroll tax cut. Congress generally extended current tax policy, including a variety of smaller deductions and credits that were set to expire at the end of the year.
The congressional actions that differed from BPC’s assumptions included the extension of enhanced unemployment benefits (a $22.4 billion increase in Fiscal Year 2013 outlays) and the higher rates and fewer deductions for high-income taxpayers ($600 billion over ten years). The unemployment insurance change would have a roughly $4 billion impact over the next two months and the tax changes might have a slightly larger offsetting impact (but which will be reduced somewhat due to delayed implementation of updated income tax withholding tables). In comparison, federal operating expenses for the first two months of 2012 combined totaled $785 billion. Therefore, BPC expects that the fiscal cliff deal will have a minimal impact on the timing of the X date, and would not have changed BPC’s November estimate that extraordinary measures would be exhausted sometime in February.
Economic Policy Project