As Treasury scrambles to pay bills, pandemic fuels uncertainty over calamitous ‘X Date’
Treasury officials face an unusually difficult task this fall in projecting precisely when the federal government will no longer be able to pay its bills, a lapse that could trigger a default and plunge America into an economic recession.
Traditionally, Treasury staff rely on historical trends of government spending and economic activity to estimate the cash balance of the federal government. But that task is significantly more complicated this year. The United States and world economies remain in an unusual state of flux because of the pandemic, leading to unpredictable fluctuations in monthly tax receipts. And the U.S. is currently administering dozens of new COVID-related economic programs that have no precedent, making the amount of cash they will spend hard to model.
The uncertainty in Treasury's projections over when the government will default — a deadline known by budget experts as the "X Date" — exacerbates the danger of the ongoing congressional brinkmanship over the nation's fiscal soundness.
Congressional Republicans are refusing to help Democrats raise or suspend the debt ceiling to authorize the amount of borrowing required by laws already passed into law by both parties. Treasury has deployed a series of "emergency measures" to allow it to meet its current obligations, such as delaying certain payments until the matter is resolved. But it is rapidly running out of these options amid the prolonged legislative standoff.
"It's always very hard to predict the cash flow of the government, but it's important to understand that it is particularly hard to do projections now," said one senior Treasury official, who spoke on the condition of anonymity to describe internal matters.
Some lawmakers have said the Treasury Department is bluffing, essentially trying to scaremonger Congress. Sen. Patrick Toomey, R-Pa., has said the Treasury would prioritize payments on its debt even if the debt ceiling isn't increased so that it wouldn't technically default if Congress doesn't act. In the past, Treasury officials have looked at whether they could prioritize these payments and delay other payments as a way to manage its cash flow in a crisis-type situation. But even steps like those aren't expected to calm investors. The closer Treasury comes to the X Date, the more investors tend to dump short-term Treasury debt, a move that can lead to panic on Wall Street and in Washington.
The federal government spends more money every year than it collects in revenue, and it makes up the difference by borrowing. Congress sets a ceiling on how much the Treasury can borrow — a limit lawmakers typically then raise, or suspend, when they approve legislation that also requires Treasury to spend more. And the Treasury Department makes millions of payments each month, making it difficult to prioritize some over others.
The most recent debt ceiling suspension, enacted under President Donald Trump in 2019, lapsed at the end of July but raised the debt ceiling to cover all of the new debt issued during its suspension. That meant the United States has a new debt ceiling, $28.4 trillion. But congressional spending by both parties requires Treasury to take on more debt, even if those programs were created months or years ago. Treasury likely needs at least a debt ceiling of $29 trillion to make it through this year alone.
Since the debt ceiling came back into effect, Treasury has funded its outstanding obligations without new borrowing primarily through accounting gimmicks that amount to shuffling funds. These "extraordinary measures" can give Treasury some breathing room but can last only a few months absent congressional action.
Budget experts are confident lawmakers have at least the first week of October — and almost certainly the second — in which the government can still issue debt with little adverse consequence. But estimates become hazier after that. Treasury has said only that the debt limit will be breached "sometime in October." The Bipartisan Policy Center, a nonpartisan think tank, has said the date is likely somewhere between Oct. 15 and Nov. 4. Several Wall Street forecasters have guessed more precise dates but acknowledge those only represent approximate ranges. Mark Zandi, chief economist at Moody's Analytics, said the date is likely Oct. 20 but could come as early as Oct. 15.
Any number of COVID-related programs could suddenly alter Treasury's cash balance. Billions of dollars in COVID relief funding for state and local governments have gone out on an unpredictable schedule. Money for natural disasters and weather-related catastrophes could also suddenly and unexpectedly drain government coffers.
"There's so much volatility with these payments," said Shai Akabas, director of economic policy at the Bipartisan Policy Center, a nonpartisan think tank. "There's always uncertainty in estimating the 'X Date' because it involves millions of payments that go out the door. But it's particularly heightened this year. There are a number of programs that are new and spend out in unpredictable ways."
Treasury said this week that it has roughly $300 billion on hand. This may sound like a lot, but roughly $150 billion will go out the door Oct. 1 — when it is required to make Social Security payments to millions of seniors and replenish a Department of Defense trust fund.
As its cash has dwindled, Treasury has pulled financial assets out of various government accounts and essentially sold them to the public for cash, according to Akabas. It has done so primarily by pulling U.S. Treasury bonds out of a fund for federal employees while also suspending the purchase of new securities for the Civil Service Retirement and Disability Fund and some similar measures. Once the debt ceiling impasse is resolved, Treasury will replenish the funds it pulled out of the accounts, holding beneficiaries harmless. Yet these options are narrowing as the congressional standoff continues.
The Biden administration has been adamant that the only way to avoid calamity is for Congress to approve a debt ceiling hike or suspension. Administration officials have rejected more heterodox economic ideas to do so unilaterally, such as having the Treasury mint a "trillion-dollar coin" to bypass the borrowing limit.
Some liberal advocates have also urged Biden to consider simply ignoring the debt ceiling law and instead invoking the Constitution, which appears to require the government to meet its payment obligations. Section 4 of the 14th Amendment of the U.S. Constitution states: "The validity of the public debt of the United States, authorized by law ... shall not be questioned."
"Yes, it may be a violation of the Constitution for the president to simply ignore the debt ceiling. But it's even more serious for him to obey the debt ceiling and have default in violation of Section 4," said Harvard law professor Laurence Tribe, whose legal advice the administration has repeatedly sought, in an interview.
Treasury has rejected this approach as well, according to a spokeswoman. Some experts say such a maneuver would do little to assure creditors of the reliability of the U.S. government to meet its obligations. Only Congress can assure the world the U.S. political system is functional enough to be a safe haven for investors worldwide, said Zandi of Moody's Analytics.
"That is not going to make an investor feel comfortable we have this under control," Zandi said. "It not only would not work but it would also threaten our system of government."