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. Law-makers have enacted numerous increases to the debt limit—commonly known as the debt ceiling—some of which have been temporary but many of which have been permanent. The Treasury’s borrowing has been at the current limit since May, although it has employed a well-established toolbox of so-called extraordinary measures that allow it to borrow additional funds without breaching the debt ceiling.
On September 25, 2013, the Treasury estimated that its ability to borrow under those extraordinary measures will be exhausted no later than October 17, leaving a cash balance of approximately $30 billion. CBO currently projects that the Treasury will exhaust all of the borrowing authority created by those measures, as well as its cash balance, between October 22 and the end of the month. (It is possible, however, that the date could fall outside of that range.)
Those dates are sooner than CBO estimated earlier this month, for two reasons: Forthcoming investments in Government Account Series (GAS) securities are expected to be greater than previously anticipated because a transfer of general funds to the Highway Trust Fund is scheduled to occur in October this year (rather than in November, as occurred last year) and because deposits in the Military Retirement Fund and the Medicare-Eligible Retiree Health Care Fund are now expected to be larger than they were last year; also, receipts of corporate income taxes during the past several days fell short of CBO’s expectations.
The debt ceiling at the beginning of 2013 was $16.394 trillion. The No Budget, No Pay Act of 2013 (Public Law 113-3) suspended the debt ceiling from February 4, 2013, through May 18, 2013. The act also specified that the amount of borrowing in that period should be added to the previous debt limit. As a result, on May 19, the limit was reset to reflect cumulative borrowing through May 18; it now stands at $16.699 trillion.
Because the No Budget, No Pay Act did not provide additional borrowing authority above the amount of debt that had already been issued as of May 18, the Treasury has had no room to borrow under its standard operating procedures. To avoid breaching the limit, the Treasury has turned to the extraordinary measures that allow continued borrowing for a limited period.
Debt subject to the statutory limit has two main components: debt held by the public and debt held by government accounts. (For more information on federal debt, see CBO's 2010 report Federal Debt and Interest Costs.) Debt held by the public consists mainly of securities that the Treasury issues to raise cash to fund the federal government’s operations and pay off maturing liabilities that tax 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 the government’s internal transactions; it is not traded in capital markets. Of the $16.699 trillion in outstanding debt subject to limit, roughly $11.9 trillion is held by the public and about $4.8 trillion is held by government accounts.
The extraordinary measures taken by the Treasury since May 17 have consisted of suspending the issuance of new state and local government securities, disinvesting a portion of the Thrift Savings Plan G Fund, and declaring two debt issuance suspension periods, which allowed it to limit the investments of the Civil Service Retirement Fund and the Postal Service Retiree Health Benefits Fund in GAS securities.
The following measures are still available:
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, both the Civil Service and the Postal Service funds, as well as the G Fund, will be made whole (with interest) after the debt limit has been raised. (For more information on extraordinary measures and actions taken after a debt limit increase, see Government Accountability Office, Debt Limit: Analysis of 2011–2012 Actions Taken and Effect of Delayed Increase on Borrowing Costs.)
Given the magnitude of the government’s daily cash flows and the uncertainty about the size of certain key trans-actions over the next few weeks, it is difficult to specify the precise date on which the Treasury will exhaust its extraordinary measures and lose its authority to borrow additional funds.
The amount of debt accumulated over the next few weeks will depend on the size of the cash shortfall during that period 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 must be borrowed from the public and when that borrowing must occur; transactions between the Treasury and other parts of the federal government will determine the amount of debt accrued by government accounts.
Certain large inflows and outflows of cash from the Treasury follow a regular schedule that directly affects the amount borrowed from the public, the largest component of debt subject to limit. Typical days and amounts for sizable government expenditures are as follows (although actual disbursements can shift by a day or two in either direction if a 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 taxes that occur around specified dates. The largest payments come in April, when individual tax returns are due. Estimated taxes from corporations and individuals are due at four points during the year. For example, in mid September of this year, the Treasury received about $55 billion in estimated corporate taxes; it is still collecting payments of estimated individual income taxes.
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 issuance may shift by a day or two in either direction if the normal date falls on a weekend or federal holiday):
In the past few months, the Treasury has raised most of its cash through end-of-the-month auctions of notes (about $55 billion, on average) and through the intermittent issuance of cash management bills (in varying amounts).
Debt held by government accounts, known as 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 program financed by a trust fund 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 the trust funds are intra-governmental 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 such programs as Social Security and Medicare. (The trust funds for those programs account for about two-thirds of the government’s balances in such funds.) 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. In the past year, the interest payments due on each of those dates amounted to about $80 billion, but because of the debt ceiling, some of those intragovernmental interest payments were not invested on June 30, 2013.
In the coming weeks, transactions on certain dates will have a significant influence on when the Treasury will exhaust the borrowing authority created by its extra-ordinary measures and will have insufficient cash to pay obligations as they become due.
At the beginning of October, large investments will be made in both the Military Retirement Fund and the Medicare-Eligible Retiree Health Care Fund to account for the amortization of the unfunded liability for certain retirement benefits earned by military personnel for service before 1985 and for accrual contributions to cover the cost of future benefits for current military personnel. Those payments are expected to boost the amount of debt held by government accounts by a total of about $80 billion.
Also, in the middle of October, the Highway Trust Fund is expected to receive an intragovernmental payment from the general fund, thereby increasing debt held by government accounts by $12 billion.
Most inflows will be from remittances by employers of income and payroll taxes withheld from paychecks. Those remittances typically average about $7 billion per day but can vary significantly from one business day to the next.
If the debt limit is not increased before the extraordinary measures are exhausted, the Treasury will not be authorized to issue additional debt that increases the amount outstanding. (It will be able to issue additional debt only in amounts equal to maturing debt.) That restriction would severely strain the Treasury’s ability to manage its cash and could lead to delays of payments for government activities and possibly to a default on the government’s debt obligations. (For more information on debt management challenges and the debt limit, see Government Accountability Office, Debt Limit: Delays Create Debt Management Challenges and Increase Uncertainty in the Treasury Market.) By CBO’s estimate, depending on the amount and timing of cash flows, the Treasury might be unable to fully pay its obligations anytime from October 22 on. Which of the government’s various financial obligations would be paid and which would not be paid is unclear.