The federal government is on track to default on the national debt sometime in between the middle of October and the middle of November without action to raise the debt ceiling, according to an analysis released Friday.
The Bipartisan Policy Center (BPC), a centrist think tank that closely tracks the debt limit, said the Treasury Department will likely run out of ways to keep the U.S. solvent sometime after the start of the fiscal year. BPC originally projected the so-called x-date to occur as soon as the beginning of October, but slightly delayed and narrowed that window after an unexpectedly strong summer surge in federal revenues.
BPC experts warned that a potential slowdown and deepening uncertainty driven by rising COVID-19 cases could shift that window sooner, bringing the U.S. closer to an unprecedented default on the national debt.
“It’s unclear what the next month or two is going to bring in federal revenues, and that can make a big difference in terms of the timing,” said Shai Akabas, director of economic policy for BPC.
“But what’s also clear is that they don’t have much more time than the end of the fiscal year,” he continued.
The debt ceiling is a legal limit on how much the federal government can owe while it pays bills already approved by the president and Congress. Raising, suspending, or reimposing the debt ceiling does not change the level of the national debt or control future spending, but rather gives the Treasury more room to borrow and pay off previous obligations.
A two-year suspension of the debt ceiling expired Aug. 1 and the Treasury Department has since used a range of “extraordinary measures” to prevent the U.S from breaching the debt limit, as it has during many previous standoffs. But while the federal government has never allowed the U.S. to default on its debt, a deep partisan stalemate and alarming uncertainty about the economy have posed significant obstacles to a deal.
Republicans have refused to support an increase to the debt limit unless Democrats agree to spending cuts and debt reduction measures, arguing that the party in control of the House, Senate and White House can do it on their own without GOP support.
Democrats, however, say Republicans have an obligation to keep the U.S. solvent after adding trillions to the debt under former President Trump and raising the debt ceiling without the major reforms they’re asking Democrats to support.
“They’re talking past each other now, rather than talking to each other, which is not a great sign when we’re only a month away from the potential x-date and that dynamic obviously has to change if we want to see a resolution,” Akabas said.
If Congress allows the U.S. to default on its debt for the first time in history, the implications could be disastrous.
The U.S dollar and trillions of dollars in Treasury securities underpin the global financial system and are considered among the safest global assets thanks to the size, strength and resilience of the American economy. But any potential breach of the full faith and credit of the U.S. could have catastrophic consequences.
Treasury Secretary Janet Yellen warned in a Wednesday letter to lawmakers that treading too close to a default “would likely cause irreparable damage to the U.S. economy and global financial markets.”
“At a time when American families, communities, and businesses are still suffering from the effects of the ongoing global pandemic, it would be particularly irresponsible to put the full faith and credit of the United States at risk,” she continued.
Akabas largely agreed, saying the impact of a default would be somewhere between “messy” and “catastrophic.”
Democratic leaders have not laid out their plans for raising the debt ceiling yet, but have ruled out including a hike or suspension in the sprawling infrastructure, social services and climate bill they plan to pass through budget reconciliation. While Democrats could theoretically raise the debt ceiling without GOP votes through reconciliation, the package may not be ready by the time the x-date arrives.
Instead, Democrats are likely to attach a debt ceiling hike to another must-pass piece of legislation — such as a measure to avert a government shutdown — and force Republicans to support it or potentially shoulder the blame for catastrophe.
“It’s obviously tied up in all the politics that are going on right down the Hill, and from my perspective it makes Halloween this year even more dangerous and spooky,” said Bill Hoagland, a senior vice president at the Bipartisan Policy Center who spent more than 30 years in various federal budget and management roles.
BPC has tracked the debt ceiling and x-date since 2011 using models developed in part by Federal Reserve Chair Jerome Powell, who was a visiting scholar at BPC before former President Obama nominated him to a seat on the central bank’s board of governors.