The Federal Debt Limit: Crunch Time

In August 2019, the federal debt limit stood at $22 trillion when Congress enacted a bipartisan budget deal that suspended it for two years, allowing the government to borrow without a ceiling. On August 1, 2021, the debt limit was reinstated at approximately $28.4 trillion, a level covering all borrowing during the suspension. On October 14, 2021, President Biden signed legislation raising the debt limit by $480 billion to approximately $28.9 trillion.

The debt limit was immediately reached upon its August 1 reinstatement. The Treasury Department must now, once again, rely on its emergency authority, known as “extraordinary measures,” to make room for more public borrowing to continue paying the nation’s bills. These measures are, effectively, accounting maneuvers that involve artificially reducing certain intragovernmental debt, such as delaying contributions to the trust funds that hold federal employees’ retirement assets. Extraordinary measures are distinctly limited, however, and only serve as a stop-gap procedure. If the debt limit is not raised or suspended before these resources are exhausted, the Treasury Department will have to rely solely on daily revenues and residual cash on hand to keep meeting the nation’s obligations. With the federal government running a large budget deficit—especially after a year and a half of COVID-19 relief spending—these funds will deplete rapidly. At that point—a day we call the “X Date”—the government will be unable to meet all of its obligations in full and on time.

Upon reaching the X Date, the nation’s bills must be paid solely out of incoming cash flows, which are insufficient to cover all government spending. The federal government will therefore be forced to miss, delay, or reduce payments owed to individuals, businesses, or other entities. Such disruption will negatively affect the economy and the lives of individuals across the country, such as veterans, Social Security beneficiaries, and the millions of Americans who depend on government services each day. While Congress has never let this happen, the risk is incalculable. Global financial markets, which rely on the stability of U.S. Treasury securities, could plummet and the U.S. dollar’s reserve currency status could be jeopardized.

Predicting the X Date always carries with it a high degree of uncertainty—not even the Treasury secretary can know when it will arrive—but the unique fiscal environment of the COVID-19 pandemic adds unprecedented difficulty to this year’s forecast. In addition to the Treasury Department’s cyclical yet unpredictable cash flows in a typical year, this year’s X Date will be highly dependent on when the remaining federal COVID-19 response spending disburses and whether the economic recovery continues to produce strong tax revenues.

Recent episodes demonstrate that a mere delay in congressional action to address the debt limit presents its own financial and reputational risks to the country. In 2011, Standard & Poor’s downgraded the U.S. credit rating, citing the political brinkmanship. Another downgrade could bring even greater market disruption. Additionally, the threat of U.S. government default leading up to the X Date adds uncertainty to the financial markets and imposes real costs. In fact, the Government Accountability Office finds that investors have demanded higher interest rates for U.S. Treasury securities maturing around the time of the X Date. Specifically, GAO estimated that the 2013 delay in raising the debt limit increased the Treasury Department’s borrowing costs by tens of millions of dollars in just one year, which taxpayers bore through higher interest rates on U.S. Treasury securities.

Failing to raise or suspend the debt limit before the X Date could be catastrophic for both U.S. recovery efforts and the global economy. Over the coming months, Congress could address the debt limit through one of two legislative avenues:

1. Regular order. The House and Senate could pass legislation, overcoming any filibuster in the upper chamber with a 60-vote majority, that is signed by the president.
2. Reconciliation process. With both Congress and the White House under control of Democrats, they could use the budget reconciliation process to raise—but likely not suspend—the debt limit. Congress must first initiate a budget resolution that outlines instructions for use of this special procedure, which would then only require a simple majority of 51 votes in the U.S. Senate and could not be filibustered.