Recently, the Internal Revenue Service (IRS) announced that it will begin accepting 2013 tax returns on January 31, 2014, ten days later than originally planned due to delays associated with the government shutdown. This action will likely cause the X Date – the day upon which the federal government has reached the debt limit, run out of borrowing ability, and cannot meet all of its financial obligations in full and on time – to occur somewhat earlier than it would have otherwise.
The debt limit is currently suspended and is scheduled to be reinstated on February 8, 2014. At that point, the Treasury Department will use extraordinary measures – legally authorized accounting maneuvers – to continue to pay bills for a limited time until policymakers take action to increase or suspend the debt limit. Previously, the Bipartisan Policy Center (BPC) projected that extraordinary measures are likely to be exhausted between late-February and mid-March, with Treasury running out of cash on hand within days thereafter. With the tax filing season delay, extraordinary measures are more likely to be exhausted towards the front end of BPC’s projected window. Today, Treasury Secretary Jack Lew announced a similar projection for the exhaustion of borrowing authority.
Extraordinary measures are expected to last for a much shorter time in winter 2014 than they lasted during mid-2013 for two reasons:
First, fewer measures will be available in February. From May through October of 2013, extraordinary measures created $303 billion in additional room under the debt limit. BPC estimates that the measures will only be worth $198 billion in early 2014. The difference is mainly because the Civil Service Retirement and Disability Fund has no securities maturing or interest payments due in February and early March, making the relevant extraordinary measure much less useful than it was in the summer of 2013.
Second, the government runs an especially large deficit in February and early March, primarily due to the payment of income tax refunds. The filing season delay means that fewer tax refunds will be paid by February 7 (and thereby incorporated into the new, reinstated debt limit), and more refunds will be paid on or after February 8, when they will cause extraordinary measures to be exhausted more quickly. Until additional data become available, estimating the precise impact is not possible.
The bottom line, however, is that unless revenues and spending change substantially from current trends, policymakers will only have a month or so after the debt limit is reinstated on February 8 to take action on the debt limit before Treasury is unable to make all payments in full and on time.
For more information, check out BPC’s FAQ on the debt limit suspension.