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In Light of New Treasury Guidance, BPC Projects Federal Debt Limit "X Date" for Fall

Washington, D.C.—The Bipartisan Policy Center has updated its model and now projects that, absent congressional action, the debt limit “X Date”—the date when the federal government will no longer be able to meet all its obligations in full and on time—will arrive in fall 2021.

BPC revised its forecast—after previously projecting the “X Date” to occur in late summer or early fall—in response to the Treasury Department’s unexpected announcement yesterday indicating that it will retain a higher level of cash on hand if and when the debt limit is reinstated on August 1.

“Treasury’s updated guidance means that the “X Date” will likely arrive after the start of fiscal year 2022,” said Shai Akabas, director of economic policy at BPC. “That would realistically allow Congress to address the debt limit as part of an appropriations package and potentially pair that move with a longer-term reform of the statute to eliminate financial risk from these recurring episodes.”

Akabas cautioned that the unique fiscal environment of a pandemic adds unprecedented uncertainty to any debt limit forecast, whether BPC’s or that of the Treasury Department. On top of the usual fluctuations in government cash flows, the “X Date’s” timing will depend on when outlays associated with the $1.9 trillion American Rescue Plan are disbursed, how tax collections evolve in a rapidly changing economy, and whether Congress extends certain benefit enhancements that are set to expire while the debt limit is in effect. For example, enhanced unemployment insurance benefits expire on September 7, while enhanced nutrition benefits expire on October 1.

Economic conditions and COVID-19 spending and borrowing patterns have also contributed to abnormal activity in the market for U.S. Treasury securities, elevating the potential for financial market disruption due to any delay in addressing the debt limit.

“While uncertainty is perhaps greater than ever before, the way to minimize short-term financial risk remains the same: acting on the debt limit soon,” said Akabas.

The reason for BPC’s adjusted projection is technical, yet straightforward. In recent debt limit episodes, Treasury has operationalized its interpretation of the suspension statute by ensuring that its Federal Reserve account held as much cash when the debt limit was reinstated as it did when the limit was previously suspended. BPC’s earlier projection had expected a continuation of this practice. Yesterday, however, Treasury implied that its interpretation of the law’s “necessary obligation” requirement includes debt issued to produce an additional cash buffer due to the volatile economic circumstances of a pandemic. As a result, if the debt limit is reinstated, Treasury will hold $450 billion of cash (as opposed to the anticipated $118 billion) prior to deploying any so-called “extraordinary measures.” That additional cash would push back the “X Date” by allowing the federal government to pay its bills for longer once the debt limit prevents net new debt from being issued.

More of BPC’s analysis of the debt limit may be found here.

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