As part of the agreement to reopen the government, Congress passed the “Default Prevention Act,” which empowers the president to suspend the debt limit until February 8, 2014. To do so, the president must send a written certification to Congress that the Treasury will be unable to issue debt meeting commitments absent a suspension of the debt limit. While the legislation includes an opportunity for Congress to disapprove and cancel the debt limit suspension, this would require a supermajority vote that is unlikely to be achieved.
Absent Congress disapproving this certification, on February 8, the debt limit would be reinstated at a new, higher level. BPC estimates that the new debt limit on February 8 would be about $17.3 trillion, roughly $600 billion higher than the previous limit. At that point, Treasury would be able to use extraordinary measures to continue to meet federal government financial obligations, although those measures would not last as long as they did in this most recent Debt Issuance Suspension Period, which covered nearly five months.
The Default Prevention Act establishes a mechanism that is almost identical to the suspension of the debt limit (via H.R. 325 – the “No Budget, No Pay Act”) that took effect between February 4 and May 19, 2013. Thus, at the end of the current suspension, the debt limit will be reinstated at a new, higher level, reflecting deficit spending between May 19, 2013 (when we last reached the debt limit) and February 8, 2014. Like the previous suspension, the legislation includes a provision that prevents the Treasury Department from “running up the debt” to build up an unusually large cash balance before reinstatement.
Under our interpretation, BPC estimates that the debt limit will increase by very roughly $600 billion on February 8. Approximately $300 billion of that amount represents the unwinding of extraordinary measures – which covered deficit spending and intragovernmental debt obligations that have occurred since May 19 – while the other $300 billion represents additional debt obligations incurred during the suspension period. This projection is particularly uncertain, given the extended period of time over which economic conditions, revenues, and spending could change.
Even so, extraordinary measures are unlikely to last long if February 8 arrives without action on the debt limit. Because of the timing of the debt limit reinstatement, the measures will create less room under the debt limit than they did in this most recent period, and they will be exhausted much more quickly due to the very high levels of spending in February resulting from the payment of income tax refunds. While government cash flows are difficult to predict this far in advance – particularly in February, with the volatility of tax refunds – and could be affected by policy and economic changes in the months ahead, as of now, we believe that extraordinary measures are likely to be exhausted between the end of February and mid-March, with Treasury running out of cash on hand within days thereafter. As always, we will continue to monitor developments, and we will update our projections as the data warrants.
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