Washington, D.C.– Less than 60 days after the newly elected Congress is sworn in this January, the federal debt limit will come back into effect at a record high level and require lawmakers to decide on a course of action to prevent the U.S. government from defaulting on its obligations.
By law, the debt limit will be reinstated on March 2, 2019. The Bipartisan Policy Center estimates it will be reinstated at a record high of about $22 trillion, assuming no action is taken by lawmakers before that time. After reinstatement, the Treasury Department will likely deploy so-called “extraordinary measures” to finance government operations for some time.
In a new projection, BPC estimates that Treasury will be able to fully fund the government until at least mid-summer 2019 by using extraordinary measures, cash-on-hand, and incoming cash flow. But costs to taxpayers will start earlier from factors associated with reaching the debt limit such as higher interest rates on U.S. Treasury securities.
If no action is taken by Congress to deal with the debt limit by mid-summer, the government will once again run the risk of hitting the “X Date,” the day when the Treasury can no longer pay all of the government’s bills in full and on time. Such an outcome would carry significant costs to the U.S. taxpayer and risks to the U.S. economy, as countries and markets around the world question the U.S. government’s creditworthiness.
“Our long-term debt path is reckless and potentially dangerous for the future of our economy, but the debt limit in its current form carries unacceptable costs and risks,” Shai Akabas, economic policy director at BPC, said. “It’s also proven to be an unsuccessful playbook for debt reduction. The American people have seen this movie before, and we should demand a different ending.”
The new BPC projection is a preliminary forecast, subject to significant uncertainty, and similar to the back-of-the-envelope projection from earlier this year. A number of factors could affect the “X Date” range, such as changes in the economic and fiscal environment or changes in the amount of extraordinary measures available.
The debt limit will be reinstated prior to the large influx of revenue to the federal government from April tax receipts, which will provide some breathing room for funding government operations for several additional months.
“April tax receipts will give Treasury a boost, but this year will be different because of the 2017 tax law,” Akabas said. “The April revenue spike will almost certainly be smaller than prior years and tax refunds will be higher.”
The return of the debt limit in 2019 will again raise questions about the limit’s effectiveness as a policy tool. BPC has outlined a reform to the debt limit that would lower the odds of a potentially catastrophic federal default and provide policymakers with better incentives for fiscal responsibility.
Shai Akabas is available for comment.
BPC will update its debt limit projections as new information becomes available here: www.bipartisanpolicy.org/debt-limit