Washington, DC – The Bipartisan Policy Center has updated its forecast and now projects that the debt limit “X Date”—when the United States will no longer be able to meet its obligations in full and on time—will most likely occur between December 21, 2021, and January 28, 2022. This narrows BPC’s previous projection of mid-December to early February. Based on available data, there continues to be a greater likelihood than usual that the X Date will fall toward the front portion of BPC’s range. To avoid the most serious potential consequences associated with the debt limit, policymakers must act in advance of the X Date.
“Those who believe the debt limit can safely be pushed to the back of the December legislative pileup are misinformed,” said Shai Akabas, BPC director of economic policy. “Congress would be flirting with financial disaster if it leaves for the holiday recess without addressing the debt limit.”
December 15 will be of particular importance. BPC’s updated X Date range factors in the $118 billion transfer to the Highway Trust Fund that the Treasury Department confirmed will be completed by that date. Further, quarterly corporate tax receipts are due that day; if they come in particularly weak, it could leave the Treasury Department with a dangerously low cash balance, hastening the X Date and increasing risks to taxpayers, financial markets, and the economy. With several large federal payments coming due in the following days and particularly towards the end of the month, this scenario would likely result in an X Date before New Year’s Day.
The elevated unpredictability of U.S. government cash flows during the COVID-19 pandemic adds additional risk to this year’s debt limit events. Spending on certain pandemic-related programs, such as small business loans that are now being forgiven, are especially uncertain, and revenues have been more volatile than usual. For these reasons, current data indicate that policymakers need to act prior to the December recess if they intend to ensure that all obligations of the U.S. government are paid in full and on time.
Failing to extend the nation’s debt limit would be an unprecedented event in modern American history that carries grave risks to American taxpayers. Failure to pay the nation’s bills on time could send immediate ripple effects throughout the global economy, particularly during a time of economic recovery and heightened uncertainty over a new COVID-19 variant.
As previous debt limit episodes have demonstrated, mere brinkmanship over how and when to address the debt limit inflicts real costs. The country could find itself in a similar position to 2011, when Standard & Poor’s downgraded U.S. government debt from its AAA+ rating. American taxpayers are once again bearing the costs of brinkmanship, as interest rates on some short-term Treasury securities maturing during BPC’s X Date range have already risen by as much as 10 basis points, repeating a pattern seen during prior debt limit debates. The recurring threat of default underscores the serious need for reform to the process.
“It never ceases to amaze that the largest economy in the world routinely comes within days of potentially missing payments to its citizens, businesses, and creditors,” said Akabas. “There has to be a better way, and in fact there is, now that a bill to reform the debt limit will be introduced with bipartisan support.”
The new legislation, entitled the Responsible Budgeting Act, would permanently de-risk the debt limit, expediting its consideration and replacing brinkmanship with a structured process for both Congress and the president to consider proposals for debt reduction. This would not only alleviate the economic costs associated with recurring debt limit stalemates, but it would refocus the debate towards policies that restore fiscal responsibility.
BPC closely analyzes the Treasury Department’s daily cash flows and available extraordinary measures, and expects to provide updated projections in the coming days.
Shai Akabas is available for comment.