On February 4, 2013, the president signed H.R. 325, legislation that suspended the debt limit until May 19. The Daily Treasury Statement for Monday, May 20 indicated that the statutory debt ceiling, which was reinstated over the weekend, rose by about $305 billion to $16.7 trillion (or $16,699,421 million, to be exact).
Because the federal government is now up against the reinstated debt limit, Treasury has again commenced use of extraordinary measures, special accounting maneuvers that allow the federal government to continue to meet its financial obligations for a limited period. Last week, Treasury Secretary Jack Lew announced that the measures at his disposal would provide approximately $260 billion of room under the debt limit. Additionally, the Secretary initiated a Debt Issuance Suspension Period, which allows Treasury to make full use of all available measures. Based upon this and other new information – such as updated projections of future dividend payments to the Treasury from Fannie Mae and Freddie Mac – we have updated our estimate of how long extraordinary measures could last before the federal government reaches a day upon which it can no longer pay all of its bills in full and on time – a date which we call the X Date. We now estimate that the X Date will occur sometime in October or the beginning of November.
In line with the Bipartisan Policy Center’s (BPC) earlier interpretation, the Treasury appears to have read H.R. 325 as allowing the debt limit increase to cover all obligations incurred after enactment of the law – which includes all net government spending and changes in intragovernmental debt related to trust fund operations – but not the debt increase on February 4 associated with the unwinding of extraordinary measures that were used beginning in late December. The practical result is that the X Date will occur earlier than it would have had the unwound extraordinary measures been added to the reinstated debt limit. Predicting the financial status of the federal government many months in advance is inherently uncertain; changes in economic conditions, fiscal policy, and laws related to the debt limit could affect this projection. Particular sources of uncertainty include, but are not limited to: further changes in dividend payment levels from those projected by Fannie Mae and Freddie Mac, whether or not the current trends in revenue growth and spending restraint persist, and unexpected spending for emergencies. We will continue to update our X Date estimate as new information becomes available.
Recent Experience with the Debt Limit
In August of 2011, the nation came very close to the X Date before the debt limit was increased as part of an agreement that resulted in the Budget Control Act of 2011 and ultimately led to the across-the-board sequestration cuts that are currently being implemented. In a study, the Government Accountability Office (GAO) found that the 2011 debt limit event resulted in higher borrowing costs of $1.3 billion for Fiscal Year 2011, and GAO noted that the total additional costs attributable to the debt limit event would be far higher, as much of the debt issued during the period would remain outstanding for many years. BPC extrapolated that analysis to estimate a ten-year cost to taxpayers of roughly $19 billion. As the U.S. approaches its upcoming X Date without a resolution in sight, the country faces increasing risks related to interest rates, credit rating downgrades, and other potential consequences. Background on this and other debt limit related issues are available in BPC’s report from January.