This blog details BPC’s recently updated debt limit “X Date” projection. If you need to get up to speed on debt limit basics, check out one of our explainers before reading on.
It was hard to miss amid all the fanfare (we kid), but the federal statutory debt limit was reinstated on March 2 at a record high of $22.0 trillion, in line with BPC’s earlier forecast. For the eighth time in the last eight years, the federal government is now operating, in part, by employing special accounting maneuvers known as “extraordinary measures.” Treasury Secretary Steven Mnuchin sent a letter to Congress requesting that the debt limit be increased “as soon as possible.”
The Congressional Budget Office has issued its own projection and similarly estimates the “X Date” will most likely arrive sometime around the end of fiscal year (FY) 2019 on September 30, 2019, or early in FY 2020.
Debt limit forecasts carry significant uncertainty, due to the unpredictable nature of the federal government’s cash flows, particularly tax revenues. This blog post explains BPC’s “X Date” projection methodology and the various forces that could alter the projection.
Forecasting the “X Date” is contingent on four main factors: Treasury’s cash on hand, the total amount of extraordinary measures available, the daily cash flows of the Treasury Department, and changes in intragovernmental debt. To accurately estimate the “X Date” range, all four factors, and their respective nuances, must be accounted for:
- Cash on Hand: The Treasury Department operates using a cash account at the Federal Reserve. By statute, the amount of cash allowed in this account at the point of debt limit reinstatement was $202 billion, which is equal to the amount left in the account when the debt limit was last suspended in February 2018. In order to arrive at this threshold, the Treasury drew down more than $200 billion from the account over the past several weeks.
- Extraordinary Measures: By law, upon reaching the debt limit, Treasury is authorized to take certain extraordinary measures to enable the government to continue meeting all its obligations. Some of these measures free up so-called “headroom,” or space, under the debt limit, while others simply provide flexibility in the timing of certain payments. BPC estimates that the main available extraordinary measures provide Treasury with roughly $408 billion in headroom. Since the federal government is running a considerable deficit, an important question is when these measures will run out.
- Treasury’s Daily Cash Flows: Treasury’s day-to-day cash flows are among the more uncertain variables in our projection, as both deposits and withdrawals vary significantly over time. At this point, the variance in cash flows is the primary reason for issuing a broad “X Date” range of fall 2019, rather than a specific week or even month. As the “X Date” comes into better focus, there is less time for variations in cash flows to affect the projection and a narrower range can be predicted.
- Intragovernmental Debt: Lastly, BPC’s “X Date” projection must incorporate changes in intragovernmental debt (such as the Social Security trust fund, highway trust fund, and many others). Projecting changes in the amount of intragovernmental debt is challenging, as these trust fund balances are the byproduct of many transactions. As usual, this is a moderately unpredictable variable in any debt limit projection.
Several other factors cause uncertainty in BPC’s projection model. Some are new, some old. These factors include:
- 2017 Tax Cuts and Jobs Act and the Recent Government Shutdown: As we have underscored elsewhere, uncertainty is even higher than usual this year due to the still-to-be-determined impact of the 2017 Tax Cuts and Jobs Act (TCJA), which is in its first full tax season of implementation. If revenues fall short of projections, it could move the “X Date” closer. The prolonged partial government shutdown earlier this year is also contributing to the uncertainty. Analysts have predicted that the TCJA will cause an increase in total tax refunds relative to previous years. The IRS has been hampered in its tax refund processing, both due to the new law and the recent government shutdown. As the figure below shows, tax refund payouts continue to lag last year’s, meaning more of their total cost will be eating up headroom after the debt limit’s reinstatement, particularly if total refunds for 2019 far exceed 2018. A particularly pessimistic outcome for these variables could lead to an “X Date” as early as late summer. We believe this scenario to be unlikely ? which is why that window is excluded from our current projection ? but we will keep a close eye on incoming data over the next several weeks and update as necessary.
- Timing of Revenues: As the figure below illustrates, federal cash inflows vary significantly based on the time of year. April, with its tax filing deadline, is always a high-water mark month, reaching about $600 billion in total deposits in 2018. In contrast, several other months tend to have totals well below that peak, at only about $250 billion. These seasonal differences mean that the timing of debt limit reinstatement determines in large measure how long headroom will last.
- Unknown, Unknowns: Significant changes to near-term fiscal policy (such as new spending on a natural disaster) or a marked shift in economic conditions (such as a recession) could materially affect BPC’s projection.
Given this uncertainty, BPC will continue to monitor incoming data and update our “X Date” range as warranted.