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Q&A: Government Shutdowns and the Debt Limit “X Date”

Fresh off a 35-day partial government shutdown, a second one could be on the horizon if Congress and the president are unable to resolve their disputes over border security by Friday, February 15.

A government shutdown carries real consequences that should not be overlooked when making those decisions. In addition to the financial burden placed on federal workers, contractors, and the economy, the shutdown earlier this year disrupted many government functions, making it more costly overall for the government to provide basic services and altering typical spending patterns. A second shutdown would exacerbate that situation and come only two weeks prior to the reinstatement of the federal debt limit on March 2.

In short, another prolonged shutdown could bring closer the debt limit “X Date,” when the federal government would no longer be able to meet all of its obligations in full and on time. A pessimistic scenario could mean that the deadline arrives during the August recess instead of later in the year. But the bigger issue is that such an impasse would represent a further deterioration of policymakers’ ability to perform the basic functions of government, making the path forward on a debt limit extension even murkier. This should concern everyone with a stake in the American economy.

Below are key questions and answers on how these shutdowns could affect the debt limit timing.

Q: Before the recent shutdown, where did things stand with the debt limit?

A: The Bipartisan Budget Act of 2018 suspended the debt limit until March 2, 2019. The debt limit will be reinstated at a record high of roughly $22 trillion, and because of the statute’s design, the federal government will immediately bump up against that level of outstanding debt. The Treasury Department will deploy so-called “extraordinary measures,” accounting maneuvers that will allow the government to continue meeting its obligations for a limited period of time.

Before the last shutdown, BPC estimated that these extraordinary measures ? along with cash on hand and incoming revenues ? would enable Treasury to fully fund the government until at least mid-summer 2019.

(For more on the difference between debt limit and government shutdown, see our “myths and facts” on the debt limit.)

Q: Did the previous government shutdown affect the timing of the debt limit “X Date”?

A: It’s not yet clear. The shutdown may have affected the timing of individual income tax refund payments, and therefore the timing of the “X Date,” but it is too early to determine with any certainty. Preliminary filing data from the IRS suggests that the total number of returns processed in the first week of tax filing season this year is 26 percent lower than last year over the same period, providing some evidence that IRS operations may already be delayed.

BPC estimates that in the absence of shutdown delays and implementation challenges at the IRS, more than $150 billion in tax refunds would have been paid out before the debt limit is reinstated on March 2. At the time of this writing, only about $10 billion in refunds have been paid out, about $6 billion less than last year over the same period (although this is a small sample size). It is difficult to determine how much of this drop is caused by the shutdown versus the Tax Cuts and Jobs Act of 2017 and challenges related to implementing the law or even random fluctuations. Whether or not this trend continues and amplifies over the coming weeks, delaying certain refunds past the date of debt limit reinstatement, will determine the impact on the “X Date.”

The shutdown did cause other irregular fluctuations in the government’s spending patterns (e.g., delayed salaries for federal employees) that likely would have affected “X Date” timing had the original shutdown persisted past March 2. Once the government reopened, however, federal cash flows largely compensated for missed payments and normalized, making most of those aberrations inconsequential.

Q: Would another shutdown affect the timing of the debt limit “X Date”?

A: Another protracted shutdown would likely affect the timing of the “X Date” but how much is unclear.

In a worst-case scenario, another shutdown could compound early signs of delays in tax refund payments. If a significant portion of refunds are delayed and instead paid after the debt limit is reinstated, Treasury would be forced to raise the cash for those refunds by using its limited extraordinary measures, moving the debt limit “X Date” nearer. A second weeks-long shutdown would also mean that other payments, such as for federal employee salaries, would be pushed beyond March 2. While much smaller in magnitude than tax refunds, such adjustments could magnify the impact described above.

In a pessimistic scenario, this could place the “X Date” during the August congressional recess rather than sometime later in the year.

Q: Would another shutdown affect the date (March 2) that the debt limit is reinstated?

A: No. Whether or not the government partially shuts down again, statute dictates that the debt limit will be reinstated on March 2, 2019. Only changes to the law can affect the timing of reinstatement.

Q: Can Treasury implement extraordinary measures during a shutdown?

A: Yes, and it has previously. While Treasury is one of the agencies that remains without full-year funding and is therefore in danger of shutting down later this week, staff in the Bureau of the Fiscal Service who implement extraordinary measures are typically deemed “excepted” during a government shutdown. For example, the Treasury Department continued to implement extraordinary measures during the government shutdown in October 2013.

That said, many other Treasury employees will be furloughed in the event of a shutdown. With staffing below full force, there may be a slightly greater risk of “something going wrong” during an extended shutdown that creates unpredictable fallout.

Q: Would another shutdown impact Treasury’s ability to borrow?

A: No. Treasury is fully capable of borrowing while operating under a government shutdown. It has done so numerous times in the past.

Although Treasury would be able to access the market, borrowing costs could rise with investors demanding higher premiums for what they view as riskier securities, given the uncertain political environment. For example, in 2017 (and in earlier debt limit episodes) Treasury interest rates spiked as the government approached the “X Date,” costing taxpayers hundreds of millions of dollars.

Q: How have government shutdowns impacted “X Date” timing in the past?

A: Typically, government shutdowns have not impacted “X Date” timing in a significant way (by more than a few days), including those in 2013 and 2018, but the fact that this possible shutdown would take place in the middle of tax season makes it potentially different.

BPC will continue to update its debt limit projections as new information becomes available: www.bipartisanpolicy.org/debt-limit

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