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Debt Limit Update: Strong Tax Season Moves Most Likely X-Date Window to November/December

By Shai Akabas, Brian Collins

Monday, May 18, 2015

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Tax filing season has come to a close, and the Bipartisan Policy Center (BPC) has updated its debt limit analysis and its projections of how long the Treasury could continue to pay all of the nation’s bills in full and on time without action by policymakers.

Revenues for the last few months have come in stronger than projected by the Congressional Budget Office (CBO) to the tune of about $40 billion, according to CBO’s Monthly Budget Review. Most of that unanticipated revenue has been in the form of non-withheld taxes (paid with tax returns or on quarterly estimated tax forms), which are up 16 percent to date—a substantial bump—over the previous fiscal year.

The tax season boon has garnered attention, but it is a backward-looking metric so it no longer has much predictive power. Non-withheld taxes collected in March and April can’t tell us much about what will happen in the coming months because those most of those taxes are being paid on income from calendar year 2014.

But the strength of revenues moving forward is an important component of the debt limit analysis. Revenues that come in more steadily throughout the year—for example, payroll and income taxes withheld from paychecks—have been strong thus far, but nowhere near the growth described above.

The higher-than-expected revenue growth has made an October X Date far less likely. Therefore, BPC has excluded it from the updated projection window, making the months of November and December the most likely X Date candidates at this point.

Substantial uncertainty in both directions persists with these projections, given the amount of time for economic and policy changes to impact federal cash flows. In light of the continued strength in revenues, however, the greater uncertainty exists on the back end of BPC’s projection window. If this trend accelerates, it could portend a need to revisit the X Date projection.

As always, the risks grow as policymakers delay action; the 2013 debt limit standoff that was paired with a government shutdown caused substantial market uncertainty and illiquidity that could have been incredibly damaging if events took a turn for the worse. Delays in increasing the debt limit have also cost taxpayers billions of dollars in extra interest costs on U.S. debt, according to BPC estimates.

As has been reported widely, the Treasury Department changed its cash management practices in late April, announcing that it would henceforth maintain a cash balance sufficient to last five business days without market access – typically somewhat over $200 billion. Previously, Treasury kept balances that were usually around $80 billion, but sometimes fell much lower.

The U.S. government was unable to conduct auctions for two business days in the aftermath of the September 11 terrorist attacks and for one business day during Hurricane Sandy, the major storm that caused substantial damage to New York City’s financial district. Treasury has been advised by experts, including the Treasury Borrowing Advisory Committee, to increase cash-on-hand as a prudent precautionary measure in anticipation of potential future threats, such as a cybersecurity failure, that could possibly interrupt the ability to issue new debt.

For the purposes of BPC’s analysis, the new Treasury cash management policy has no impact on the debt limit or X Date timing. To fulfill this new practice, Treasury will use borrowing authority obtained from extraordinary measures sooner than it otherwise would have to raise additional cash, but this will not create any further room under the debt limit because the greater cash balances will be completely offset by the lessened borrowing authority from which they are obtained.

The most important takeaway is that at some point in the coming months, barring action by policymakers, Treasury will be unable to adhere to this new policy. After all extraordinary measures are exhausted, Treasury’s cash on hand will once again dip below $200 billion, placing the nation’s finances in a position that has been deemed riskier by a number of experts. This serves as a reminder of the risks that grow as the X Date approaches with no resolution to the issue in sight.

BPC will continue to monitor developments and update its debt limit projections as warranted. For more on the debt limit, please visit: