Government Shutdown Effect on Debt Limit: This Time May be Different

Lawmakers face yet another deadline over the federal budget on Thursday, raising the possibility of a second consecutive government shutdown. Amid this latest round of budget negotiations, the debt limit “X Date” is quietly approaching (BPC’s latest projection is March 2018), at which point the federal government would no longer be able to meet its financial obligations in full and on time. Given the proximity of those two events, if an agreement on budget levels and other key priorities cannot be reached, it will be important to know how a government shutdown could interact with the debt limit.

A prolonged shutdown at this time during tax season could have an impact on the “X Date,” primarily because it could delay the processing of 2018 tax refunds. However, our analysis of recent government shutdowns shows that to have a large enough impact to materially move the “X Date,” a government shutdown would have to last at least a week, possibly longer. According to our analysis, other categories of spending do not fall significantly enough to have a large “X Date” impact.

Unlike other recent shutdowns, the impending one would land squarely in the middle of tax season. Given IRS guidance that, in the case of a shutdown, employees in charge of issuing tax refunds would be furloughed, any extended closure would likely slow down the distribution of refunds. Tax return filing started as early as Jan. 29, and any refunds owed are typically delivered by the IRS within 21 days. If disbursement of refunds takes longer than usual, it could push the “X Date” later, because the government would be holding those funds longer.

In the case of a shutdown, employees in charge of issuing tax refunds would be furloughed, any extended closure would likely slow down the distribution of refunds.

Last year, individual tax refunds totaled about $180 billion during February and March, so the pool in question is large enough to have an impact if a portion of it were delayed by several weeks. The longer a government shutdown continues the more refunds would be delayed, potentially pushing back the “X Date.”

Refunds are the key question mark when it comes to a potential shutdown’s impact on the “X Date,” because our analysis of other spending showed only small effects. Using the Treasury Department’s daily statements, we examined key categories of spending, comparing their levels during the shutdown to the equivalent days in the years that came immediately before and after. The most recent shutdown of significant length, which took place in 2013 from October 1 to 16, began on the first day of the fiscal year and lasted for just over two weeks. Overall, most categories of spending experienced little-to-no decline compared to the same period in 2012 and 2014.