Debt Limit 2025: What’s Ahead, and What to Know

On January 2, the debt limit was reinstated at $36.1 trillion to accommodate borrowing since its suspension through the Fiscal Responsibility Act of 2023. After a brief decrease in debt mainly due to the redemption of special securities in the Medicare trust funds, the U.S. will reach its debt limit on January 21. Until Congress acts to modify the limit, the Treasury Department must rely on approximately $700 billion of cash on hand and about $350 billion of available extraordinary measures to continue paying our bills in full and on time.

Monitoring the X Date

BPC is closely monitoring daily cash flows to project when Treasury will find itself at high risk of exhausting existing cash on hand and extraordinary measures and defaulting on its obligations—what BPC has coined the X Date. How quickly we reach the X Date depends heavily on several factors, including:

• Total 2024 tax refunds during the first quarter of the calendar year, when most taxpayers file their taxes.
• The strength of individual and corporate tax collections during tax season.
• The volume and speed of disaster recovery outlays in regions impacted by recent hurricanes, wildfires, and other emergencies.

Cash on hand and extraordinary measures will enable the federal government to continue fulfilling its obligations through tax season, at which point an influx of revenue will help Treasury buoy its finances for an additional, uncertain period. As always, there is significant economic and policy uncertainty this far out. During the prior debt limit episode in 2023, for example, tax collections were $250 billion short of Congressional Budget Office expectations, and tax filing relief granted by the IRS to people impacted by disasters in California (among other localities) resulted in $42 billion in delayed tax collections. These combined factors accelerated the initial time frame—potentially by several months—and heightened uncertainty over the X Date.

The Costs to Taxpayers

Prior debt limit episodes have demonstrated the costs and risks to taxpayers from delayed action on the debt limit, underscoring the benefit of lawmakers acting far in advance of the X Date. Interest rates on short-term U.S. securities increased during debt limit episodes in 2011 and 2013, adding to total net interest costs funded by taxpayer dollars. Credit rating agencies Standard & Poor’s and Fitch downgraded U.S. government debt following episodes in 2011 and 2023, respectively. Moody’s also downgraded its outlook on the United States’ credit rating in 2023. Sovereign credit downgrades are especially concerning because they can cause some investment funds to stop investing in U.S. securities, leading to higher borrowing costs. This eventually makes it more expensive for Americans to borrow funds to purchase homes, cars, and more.

Failing to address the debt limit in a timely manner can undermine investor confidence that the federal government will make good on all its obligations, and lenders may demand higher interest rates—which results in higher costs for taxpayers. During the culmination of the 2023 debt limit episode, Treasury sold $50 billion of four-week securities scheduled to mature on June 6 at a record 5.84% yield, the highest auction yield since 2000, demonstrating that there is a cost to brinkmanship and waiting until the last minute.

Further, a dwindling Treasury cash reserve during last-minute debt limit negotiations inhibits the government’s ability to respond to costly economic and geopolitical emergencies.

Important Facts about the Debt Limit

With each debt limit debate, key issues reemerge that are important for policymakers and the public to remember.

• Increasing the debt limit does not authorize new spending. Rather, it enables the federal government to borrow to pay the bills that Congress and the president have already approved.
• A default on federal obligations is not the same as a government shutdown. A government shutdown temporarily halts certain government services when Congress fails to enact appropriations bills on time. A default on our debt is much more severe, fueling economic uncertainty and jeopardizing the nation’s creditworthiness. There have been two major shutdowns since 2000, while the U.S. has never systematically defaulted in modern history. (A “mini default” occurred in 1979 due primarily to technical problems at the Treasury Department which were remedied within days.)
• Debt limit battles have not generated fiscal discipline. While debt limit negotiations since 2011 have in instances imposed modest discretionary spending caps, the upward trajectory of federal deficits has continued—regardless of which party controlled the presidency or Congress. Debt limit debates have focused on whether the U.S. will default on its obligations rather than serious discussions about how to put the budget on a more sustainable path. Reforms to the debt limit process could shift attention toward a more productive focus on getting our fiscal house in order.
• Beyond the X Date, there is no established playbook for how the Treasury Department would proceed. Upon crossing the X Date, Treasury would likely prioritize some payments over others—for example, making interest payments—and it’s possible that similar determinations would be made among other government programs, from veterans benefits to Social Security checks. Alternatively, Treasury might wait days or weeks for enough revenue to be deposited to cover an entire day’s obligations and pay them all at once—while obligations from the intervening days pile up. Both the legal basis and technical systems on which Treasury would rely for either approach are highly risky and untested. Any response could be immediately contested in the courts and potentially lead to disastrous economic fallout.

The Need for Bipartisan Solutions

Finally, while the short-term priority for lawmakers is to address the debt limit and avoid default, there is also a need to stabilize the fast-growing national debt. Debt held by the public stands at $29 trillion (nearly 100% of gross domestic product), and the federal government is projected to add another $20 trillion of debt over the next 10 years. Returning to fiscal sustainability will require policymakers to look at the government’s entire balance sheet, including how much it collects in taxes, how efficiently it operates, and how to restore solvency to major health and retirement programs. Meeting such an enormous challenge will require durable bipartisan solutions, especially with the slim margins of this Congress.