17 Apr Q&A: What You Need to Know About the 2025 Debt Limit in Budget and Appropriations
What happens if Congress doesn’t raise or further suspend the debt limit ahead of January 1, 2025?
Treasury will begin deploying extraordinary measures and relying on its existing cash on hand on January 2, 2025, following expiration of the current debt limit suspension at midnight on January 1. Eventually, because the federal government is running large deficits, those resources will deplete and the U.S. will cross the X Date, the day on which the federal government will no longer be able to meet all its obligations in full and on time.
What happens when a suspension ends?
When the debt limit is raised, Treasury’s net borrowing—and thereby its cash on hand—is directly constrained by the new limit. In contrast, when a suspension ends, the debt limit is automatically increased by the amount of obligations the U.S. government incurred during the suspension period. Congress limits the increase to “necessary” obligations of the federal government during the suspension period. Several, but not all, recent debt limit suspensions (including the current one established by the Fiscal Responsibility Act of 2023) have also prohibited Treasury from increasing its cash on hand balance “above normal operating balances in anticipation” of the end of the debt limit suspension period.
What does it mean for Treasury to have cash on hand, and how much cash on hand did Treasury have when the last suspension period ended in August 2021?
Treasury’s cash on hand has become an increasingly important determinant of when the X Date will arrive because, since 2011, Congress has generally shifted from raising the debt limit by a specified amount to suspending the debt limit for a specified period of time. For example, Treasury began deploying extraordinary measures in August 2021 with $459 billion in cash on hand.
What does the newly released 2021 DOJ opinion mean for Treasury’s cash balance?
A recently published 2021 Department of Justice (DOJ) legal opinion for the Department of Treasury offers some indicators of how Treasury has thought about its cash on hand balance in the recent past. DOJ’s Office of Legal Counsel (OLC) informed Treasury that it is allowed to maintain a “standard one-week cash balance, adjusted for uncertainty and risk,” rather than drawing down its cash balances “considerably” as it had when previous debt limit suspension periods were coming to an end.
What does this mean for X Date timing and congressional action?
There is significant uncertainty regarding how much cash on hand Treasury will hold come January 2, 2025—a variable that will have a significant impact on the X Date range. Congress should expeditiously address the debt limit, ideally ahead of the January 2 reinstatement. Waiting to act creates significant financial uncertainty and increases the risk of potentially catastrophic consequences from a default on the government’s obligations.
