The Congress has traditionally placed a limit on the total amount of debt that the Department of the Treasury can issue to the public and to other federal agencies. Lawmakers have enacted numerous increases to the debt limit—commonly known as the debt ceiling—some of which have been temporary and many of which have been permanent. Treasury debt is now approaching the current limit.
The current statutory debt limit is $16.394 trillion. As of November 27, 2012, debt subject to that limit stood at $16.279 trillion—$115 billion below the statutory ceiling.
The Treasury anticipates that borrowing will reach the current limit near the end of December 2012. However, because the Treasury can take certain measures that it has used previously when borrowing approached or reached the debt limit, the Congressional Budget Office (CBO) expects that the department will be able to continue funding government activities without an increase in the debt limit until mid-February or early March.
Debt subject to the statutory limit consists of two main components: debt held by the public and debt held by government accounts. Debt held by the public consists mainly of securities that the Treasury issues to raise cash to fund the operations and pay off the maturing liabilities of the federal government that revenues are insufficient to cover. Such debt is held by outside investors, including the Federal Reserve System. Debt held by government accounts is debt issued to the federal government’s trust funds and other federal accounts for internal transactions of the government; it is not traded in capital markets. Of the $16.3 trillion in outstanding debt subject to limit, $11.5 trillion is held by the public and $4.8 trillion is held by government accounts.
If the Congress does not raise the current debt limit, the Treasury will have to employ alternative strategies for managing its cash and borrowing in order to continue funding government activities. In fact, the Treasury has a well-established toolbox of so-called extraordinary measures that will make continued borrowing possible for a limited time if the current debt limit is reached. Specifically, the Treasury can take the following steps:
Those measures provide the Treasury with additional room to borrow by limiting the amount of debt held by the public or debt held by government accounts that would otherwise be outstanding. By statute, if those measures are taken, both the Civil Service and Postal Service funds, as well as the G Fund, will eventually be made whole (with interest) after the debt limit has been raised.
Because the federal government will be running a significant deficit in 2013, the Treasury’s extraordinary measures will allow the government to continue operating for only a limited time. Given the magnitude of the government’s daily cash flows and uncertainty about the size of certain key transactions over the next few months, it is difficult to be precise about the date on which the Treasury will lose its authority to borrow additional funds. That uncertainty includes the possibility of substantial delays by the Internal Revenue Service (IRS) in processing many individual income tax returns and issuing refunds—which are usually considerable in February and March—if significant changes to the rules regarding the alternative minimum tax are not enacted by the end of December or possibly very early in 2013. (In preparing tax forms and programming its computers, the IRS may anticipate the types of adjustments to the AMT that have routinely been made in recent years, and would be delayed in processing returns if those adjustments are not made soon.)
The amount of debt accumulated over the next few months depends on the size of the deficit during that period (which largely determines how much additional cash the government needs) and on the magnitude of transactions between the Treasury and other parts of the federal government. The amount of cash flowing to and from the government will determine how much needs to be borrowed from the public and when that borrowing must occur. In addition, transactions between the Treasury and other parts of the federal government, described below, will increase the amount of debt held by government accounts.
Certain large inflows of cash to and outflows of cash from the Treasury follow a regular schedule. That schedule directly affects the amount of borrowing from the public, a key component of debt subject to limit. For large government expenditures, the following are typical dates and amounts (although the actual date of a disbursement may shift by a day or two in either direction if the normal payment date falls on a weekend or federal holiday):
Deposits (mostly tax revenues) are relatively smooth throughout each month except for large payments of nonwithheld taxes occurring near specified dates. The largest payments occur in April, when individual tax returns are due. Estimated taxes from corporations and individuals are due at four different points in the year, including mid-December (for most corporations) and mid-January (for individuals). In addition, corporate income tax receipts rise in March, when most corporations’ tax returns are due.
The Treasury issues numerous securities to obtain funds to pay off maturing securities and to finance government activities. Those securities, which have various maturities, are normally issued in regularly scheduled auctions (although the date of issuance may shift by a day or two in either direction if the normal issuance date falls on a weekend or federal holiday):
Debt held by government accounts—Government Account Series (GAS) securities—is dominated by the transactions of a few large trust funds. When a trust fund receives cash that is not immediately needed to pay benefits or to cover the relevant program’s expenses, the Treasury credits the trust fund with that income by issuing GAS securities to the fund. The Treasury then uses the cash to finance the government’s ongoing activities. When revenues for a trust fund program fall short of expenses, the reverse happens: The Treasury redeems some of the GAS securities. The crediting and redemption of securities between the Treasury and trust funds are intragovernmental in nature but directly affect the amount of debt subject to limit.
On net, the amount of outstanding GAS securities tends to fluctuate very little during a month, except when redemptions occur to reflect the payment of benefits for programs like Social Security and Medicare. (Those trust funds account for about two-thirds of the government’s trust fund balances.) However, those redemptions of GAS securities, which reduce the amount of debt subject to limit, are normally offset by additional borrowing from the public to obtain the cash to make actual payments. Most GAS securities pay interest in the form of additional securities on June 30 and December 31. (Recent payments have amounted to about $80 billion on each day.)
In the coming months, transactions on a number of key dates will determine what steps the Treasury will have to take to stay under the debt limit and when those steps will be necessary. The first such date is December 31, when a large interest payment is due to trust funds for Social Security and other programs. If the debt limit is unchanged, CBO expects that the Secretary of the Treasury will employ the extraordinary measures described above to clear room under the debt ceiling and continue to raise cash to finance government activities. CBO expects that employing such measures would enable the Treasury to continue borrowing from the public through at least mid February.
But the amounts of some large inflows to and outflows from the federal government could influence when the Treasury will be unable to borrow further under the current limit, even after taking the extraordinary measures:
Depending on the amount and timing of other revenues and outlays, any of those dates involving large cash outflows could prove binding for the Treasury’s ability to borrow.