U.S. could be unable to pay its bills in weeks as debt limit approaches

As Congress gears up for another fight over the debt ceiling, the so-called "X date," when the United States is no longer able to meet its debt obligations on time, will most likely fall between December 21, 2021 and January 28, 2022, the Bipartisan Policy Center projects. This new projection is a narrower window than the group's previous assessment of when the risk will dramatically escalate, which was mid-December to early February.

Treasury Secretary Janet Yellen told the Senate Banking Committee earlier this week she's confident the U.S. will be able to meet its obligations through December 15, but there are scenarios in which the government might not be able to pay its bills after that date if lawmakers do not raise the debt ceiling. She warned that a failure to raise the debt limit would "eviscerate" the economic recovery. 

The Bipartisan Policy Center's timeline factors in the $118 billion transfer to the Highway Trust Fund that the Treasury Department confirmed will be completed by December 15. Quarterly corporate tax receipts are due that day. If they come in weak, it could leave the Treasury Department with a dangerously low cash balance, the organization warned.

"Those who believe the debt limit can safely be pushed to the back of the December legislative pileup are misinformed," said Shai Akabas, director of economic policy for the center. "Congress would be flirting with financial disaster if it leaves for the holiday recess without addressing the debt limit."  

Adding to the uncertainty is the unpredictability of U.S. government cash flows during the COVID-19 pandemic, revenues have been unusually volatile and spending on certain pandemic-related programs have been uneven.

Failing to pay the country's bills on time could have a ripple effect across the economy, particularly during a time of economic recovery and mounting questions over a new COVID-19 variant, the Bipartisan Policy Center said. Even the uncertainty over the U.S. meeting its obligations has costs. The U.S. could face have its credit rating downgraded as it did in 2011. Interest rates on some short-term Treasury securities have already risen.

"It never ceases to amaze that the largest economy in the world routinely comes within days of potentially missing payments to its citizens, businesses, and creditors," said Akabas. "There has to be a better way, and in fact there is, now that a bill to reform the debt limit has been introduced with bipartisan support."

Both Senator Majority Leader Chuck Schumer and Senate Minority Leader McConnell have been adamant the U.S. would not default on its debt and talks to address it are underway.

Several proposals have been floated as ways to address the debt limit so the U.S. would not be barreling toward default every few months. Some have suggested raising the debt limit to a massive amount. Others have called for eliminating the debt ceiling all together. 

A new bipartisan bill, the Responsible Budgeting Act, which is backed by Bipartisan Policy Center experts, will also be introduced shortly by Representatives Scott Peters of California and Jodey Arrington of Texas.

"Every economist from the most conservative to the most liberal acknowledges that the path we're on is not sustainable, but there's very little consensus about when to do something about it," Peters said. "To be honest, I think both parties have been, fallen short on this, and I think we're trying to deal with it in a responsible way here."

The bill provides two options for temporarily suspending the debt limit. If Congress passes a concurrent budget resolution that reduces the debt per GDP by at least 5% over 10 years, it would automatically generate separate legislation to suspend the debt limit through the end of the following fiscal year. 

If Congress has not acted on a budget resolution or if the debt limit is close to being breached, the president could request a suspension through the following fiscal year, which would go into effect unless Congress passed a resolution of disapproval. To do this, the president's request to Congress would need to be accompanied by a debt reduction proposal that the House and Senate would both have to hold floor votes on.

"We already have a lot of interest on both sides, and I suspect this could be an option that we could put on the table one day with the leadership as a better and more viable path," Arrington said.