The Debt Limit: Updated X Date Projection

Loren Adler contributed to this post.

On February 4, President Obama signed into law H.R. 325, which suspended the debt limit until May 19. At the time, we offered a detailed interpretation of this novel approach to the debt limit, along with a projection of the new X Date (the date on which Treasury would be unable to make all payments in full and on time).

Beginning on May 19, the debt limit is scheduled to come back into force at a new, higher level, reflecting deficit spending since enactment of the suspension. As such, the nation will again be up against the debt limit on May 19.*

The Bipartisan Policy Center (BPC) projects that the new debt limit on May 19 will be somewhere between $16.6 and $16.7 trillion, roughly $250 billion higher than the previous debt limit ($16.394 trillion). Once that date arrives, under current law, the Treasury Department can begin to deploy “extraordinary measures,” which will allow the federal government to continue meeting all of its obligations in full and on schedule for an additional period of time.

Since our last X-Date projection, some policy uncertainty has been removed due to passage of continuing appropriations for the second half of Fiscal Year (FY) 2013, and additional information about government revenue and spending growth has become available. As such, we have updated our debt limit projection model, and now estimate that the X Date will occur between mid-August and mid-October of 2013, with the most likely points in that range being early September or early October.

We must emphasize the difficulty involved in projecting the federal government’s cash position five or six months in advance, and our estimates may change as updated financial information becomes available. Also, these projections could shift if new laws are enacted over the coming months that affect federal revenue, spending, or the debt limit statute. We will continue to monitor economic and policy developments and update our projections accordingly.

The Details

There are two primary reasons for our broad estimated X-Date range: first, the projection window remains nearly half a year away, leaving substantial uncertainty over economic conditions in the interim. Second – and even more important – our most-likely scenario forecasts a potential “close call” in early September. Although we project a surplus for September as a whole, several large payments will be due by the third of the month, including Social Security, Medicare Advantage, veterans’ benefits, military retirement, and active duty military pay.** These payments will result in a cash flow deficit at the beginning of September. August is expected to have a substantial cash flow deficit overall, so if economic conditions and the deficit were to modestly worsen, there would not be enough cash-on-hand at the end of August to make all payments owed by the third of September. Because we project the rest of September to have a large surplus, however, if Treasury is able to make these early-month payments in full and on time, it should be able to “coast” through the rest of September and reach early October before experiencing cash flow problems.

Additionally, our new estimate of the increase in the debt limit scheduled for May 19 is significantly lower than our estimate prior to passage of H.R. 325 for two primary reasons. First, our earlier estimate assumed that the legislation would be enacted before the end of January. According to BPC’s interpretation of the statute, because H.R. 325 was not enacted until February 4, substantial net payments that were made in the first days of February will not be incorporated in the new, higher debt limit level.*** Second, federal spending in recent months has been somewhat lower than we projected in January – partly due to anticipation and implementation of sequestration (which had not yet gone into effect at the time), and partly due to other factors.

Assumptions

BPC’s projections are based on the following assumptions:

1. No significant changes are made to current fiscal policy (such as emergency spending or an increase in the debt limit beyond what would otherwise occur on May 19).
2. Economic conditions do not deviate substantially from current projections. Compared to FY 2012, we have already incorporated higher revenues and lower spending into our projection model.****
3. The new debt limit level on May 19 is set according to BPC’s interpretation of H.R. 325. Specifically, we believe that the statute will effectively reduce the available extraordinary measures on May 19 by the amount of extraordinary measures that had been used prior to (and were unwound on) February 4. As a new approach to the debt limit, however, H.R. 325 contains complex statutory provisions that are being implemented for the first time. As such, BPC’s interpretation may not prove to be correct, and an alternative could impact timing of the X Date.

* In effect, since the U.S. was at its debt limit on February 4 (upon enactment of H.R. 325) and the level is set to increase only by the amount of obligations incurred between that date and May 19, Treasury will immediately find itself up against the limit once again as the suspension expires. For further analysis of H.R. 325, see our earlier post.

** Some of these payments will actually be made on the final business day of August because September 1 of this year falls on a weekend.

*** These payments included, among others, Medicare Advantage, veterans’ benefits, military retirement, and active duty military pay.

**** In addition to overall higher revenue in FY 2013 as compared to the previous year, Treasury has experienced a significant “bump” this April – about $12 billion higher for the first 21 business days – in non-withheld individual income tax payments compared to April 2012. (Some of this increase is the result of accelerated dividend, salary, and bonus payments, as well as capital gain realizations, that were timed in response to changes in tax policy effective for calendar year 2013.) This “bump” will not affect the X Date, because it is occurring during the debt limit suspension period, but it will reduce the level of the new debt limit that will take effect on May 19.