On January 7, the Bipartisan Policy Center (BPC) released the second part of its debt limit analysis. In November, BPC had projected that the debt limit would be reached in the last week of 2012, and special accounting maneuvers known as “extraordinary measures” would allow Treasury to continue to pay federal obligations in full and on time until some point in February 2013. With the passage of the American Taxpayer Relief Act of 2012, otherwise known as the fiscal cliff deal, and updated government financial data, BPC has been able to update and refine that projection, which includes a close analysis of daily cash flows over the upcoming months.
We have already hit the debt limit. Treasury officially reached the statutory borrowing limit (to be exact, $16,393,975,000,000, or just $25 million under the $16.394 trillion statutory limit) on December 31, 2012. To raise additional funds for paying the nation’s obligations, the Secretary has begun to use the approximately $200 billion in available extraordinary measures. Unless the debt limit is increased, eventually there will come a point when Treasury does not have enough cash to pay all bills in full and on time, and the government will be forced to default on some of its obligations. BPC refers to this date as the “X Date.”
The fiscal cliff deal didn’t change much. The main differences from BPC’s baseline policy assumptions are the continuation of enhanced unemployment benefits and higher taxes on very high income households. The impact of these policies on the next two months will be relatively small and partially offsetting.
BPC now projects that the “X Date” will occur between February 15 and March 1. Our model estimates that the most likely candidate for the X Date is in the latter half of that range. The odds are extremely low that the extraordinary measures announced by Secretary Geithner could delay a default beyond March 1 due to several large payments that are due on that day, including obligations to Social Security beneficiaries and Medicare providers.
There are two “wild cards” that could substantially impact our estimated X Date window. First, federal revenues are sensitive to broader changes in the economy; while Fiscal Year 2013 revenues have been exceeding Congressional Budget Office (CBO) projections –and BPC’s model takes this into account –this trend may or may not continue.
Second, and most importantly, Internal Revenue Service (IRS) tax refunds make up a substantial portion of cash outflows during February – around $100 billion in recent years. If the payment of tax refunds is significantly delayed for some reason, it would impact the timing of the X Date. (For more information on this “wild card” and the delayed tax filing season, click here)
How will Treasury make payments on or after the X Date? We don’t know. This would essentially be an unprecedented situation. In the month following the start of BPC’s X-Date window (February 15 – March 15), we project $277 billion in revenue and $452 billion in scheduled payments, meaning that $175 billion (39 percent) of obligations would go unpaid.
In one scenario, Treasury would prioritize some payments over others; our full report provides a couple of illustrative examples. Treasury, however, may not find that it has the legal authority or the technical capability to do this (because it might require extensive reprogramming of computer systems, which may not be possible in a short timeframe). An alternative approach would be for Treasury to wait until enough revenue is collected to make an entire day’s worth of payments at a time, meaning that all payments would be made in turn, but everyone anticipating funds from the government would see delays. BPC believes that this may be the more likely outcome because it lacks the legal and technical uncertainties entailed by the first option. In any scenario, we assume that Treasury would do whatever it could to ensure interest on the debt is paid in full and on time.
Substantial debt is scheduled to roll over after the X Date. In the month following the start of the X-Date window, about $500 billion in debt is expected to mature. Normally, this would be rolled over in a standard procedure by issuing new debt. Uncertainty surrounding the debt limit, however, could force Treasury to pay higher interest rates on this newly issued debt. Also, while very unlikely, there is a possibility that in a post-X-Date environment, Treasury may not have sufficient buyers to complete its standard auction operation.
Expect more updates. BPC will continue to update and refine our X Date estimates as new information becomes available. To learn more, please view our full report.
- Will the Delay in the Tax Filing Season Affect the X Date? January 11, 2013