The federal debt limit has historically been a partisan issue, but it has metastasized in recent years. This should not be surprising given how increased polarization has dominated our entire legislative process over the past several decades. As we look back at the debt limit cliff that was just narrowly avoided and forward to another event in the coming months, BPC’s goal is to continue providing objective analysis that can help inform policymakers and the public about this critical issue. When our analysis is used by one side or the other for political gain, it undermines the nuanced and unbiased perspective we have provided for the past decade. We therefore offer additional context here for how our “X Date” range should be understood and interpreted.
Our principal reason for providing this context is concern that some readers have misinterpreted the window we present as a safe range to forestall default. This interpretation is a misreading of BPC’s analysis. BPC’s view has always been that policymakers must act before the beginning of the X Date range—ideally well before—if they wish to responsibly protect the U.S. and global economies. The ramifications of any missed payments could be severe, and even approaching the X Date has negative economic consequences. As we explain below, the risks of default increase every day starting at the front end of our projected range. Accordingly, venturing even one day into our projected range invites serious economic risk.
On August 1, 2021, the federal debt limit was reinstated at $28.4 trillion, a level covering all borrowing that occurred while the debt limit was suspended over the prior two years. The country immediately hit this limit, and the Treasury Department was forced to rely on its remaining cash on hand and extraordinary measures to continue financing the government’s obligations. As during past debt limit episodes, BPC projected when the X Date—the point at which the U.S. would exhaust these resources and no longer be able to pay all its obligations in full and on time—would occur. Before President Joe Biden signed a $480 billion debt limit increase into law on October 14, 2021, BPC estimated that the country would cross the X Date sometime between October 19 and November 2.
Rather than predicting a specific day when the United States is most likely to begin missing payments, BPC releases a range during which we are fairly confident that will occur. We take this approach for two reasons. First, all estimates of the X Date are subject to significant uncertainty. We are attempting to assess millions of payments flowing in and out of the federal government on a daily basis. The uncertainty has only been exacerbated this year by the unpredictable timing of COVID-19 relief spending and particularly volatile federal revenues. From basic statistics, our range is similar to a confidence interval that incorporates uncertainty—in contrast to a projection of a specific day, which does not.
Second, given the grave consequences that could ensue if the nation crosses the X Date, it is helpful for policymakers to grasp the earliest that the X Date is likely to occur and understand there are risks even leading up to that date. While the probability that the X Date will fall on the first day of our range is small (just as it is that it will not arrive until the last day), lawmakers play with fire if they fail to address the debt limit before the beginning of the X Date range. As the graph below illustrates, the cumulative probability of the X Date occurring increases over the course of the range. This means that as we progress through the X Date range, the likelihood of the X Date occurring rises.
BPC updates and narrows its X Date range with each additional data point on federal cash flows. For example, the strength of September quarterly tax payments was a major unknown factor when projecting this fall’s X Date. When those revenues arrived, we narrowed our projection from mid-October through mid-November to October 15-November 4, before further refining our prediction to October 19-November 2 with more available data.
Policymakers should not interpret BPC’s projections to suggest that they can delay action on the debt limit until the beginning of the X-Date range without consequence: History has taught us time and time again that real costs and risks begin appearing in the weeks and months prior. The impact of debt limit brinkmanship has already drawn the attention of credit rating agencies this year, indicating they may downgrade the United States. Before the October 14, 2021, debt limit increase, interest rates on short-term Treasury securities that mature near BPC’s X Date range rose markedly, demonstrating a degree of concern in the market. Ultimately, taxpayers are on the hook for these increased borrowing costs.
BPC will prepare an updated X Date range that accounts for the $480 billion debt limit increase enacted on October 14, 2021. Congress proposed this increase to ensure that the X Date would not be reached before December 3, 2021. Treasury Secretary Janet Yellen confirmed that as consistent with her department’s projections in yesterday’s letter. It is also consistent with BPC’s modeling.
If Congress has interpreted the available information appropriately, the December 3 date associated with the $480 billion reflects a conservative assessment, and BPC will project an X Date range that exceeds December 3, possibly by a considerable margin.
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