Washington, DC – The Bipartisan Policy Center has updated its model and now projects that, absent action by Congress, the debt limit “X Date”—the day when the federal government can no longer pay all of its bills in full and on time—will be reached in late summer or early fall.
As policymakers begin to advance budget resolutions and debate additional economic relief to combat COVID-19, they must consider that the federal debt limit, suspended since August 2019, is set to be reinstated on August 1 of this year.
“Congress should immediately begin considering how they will address the debt limit and avoid another flirtation with default,” said Shai Akabas, BPC’s director of economic policy. “So far, we’ve dodged the worst outcomes, but there have been serious costs associated with prior debt limit episodes. Investors doubted the creditworthiness of the United States, taxpayers were saddled with higher interest rates on our debt, and Americans continued to lose faith in the government’s ability to do its job.”
When the debt limit is reinstated in August, it will be set at a level that covers all of the obligations incurred by the federal government since the limit was suspended. BPC expects that level to be at least $27 trillion, if not significantly higher. That figure would be $5 trillion more than when the debt limit was last reinstated in March 2019.
After August 1, the Treasury Department will begin deploying so-called “extraordinary measures” to allow the federal government to continue meeting all its obligations. Once they are exhausted and the Treasury Department’s reserve account runs out of cash, the federal government will reach the “X Date” and default on its obligations.
BPC’s projection is preliminary and surrounded by even more uncertainty than usual. Monthly changes in the federal balance sheet are difficult to forecast in normal times. Now—when future spending depends on a COVID-19 relief bill that has not yet been passed and future revenue depends heavily on the strength of the economic recovery—projecting federal finances is especially challenging. As we move closer to the debt limit’s reinstatement and learn more about this year’s spending and revenue, BPC will update its projection.
“Our forecast is uncertain, but two facts are not,” said Akabas. “First, the debt limit has manifestly failed to restrain federal borrowing. Second, the limit has created periodic crises that have consumed Congress’s time and dragged the United States to the edge of default.”
BPC has outlined a proposal that would avoid the debt limit’s standing invitation to brinkmanship while forcing Congress to reckon with the actual cause of debt—annual taxing and spending decisions.
Shai Akabas is available for comment.