The US will likely start to default on its obligations over the summer or in the early fall if Congress doesn’t address the debt ceiling before then, according to a new analysis released Wednesday. The timing should become clearer after the 2022 tax revenues come in this spring.
The new projection from the Bipartisan Policy Center is in line with a forecast issued last week by the Congressional Budget Office, which said the default could take place between July and September. Meanwhile, Goldman Sachs expects the so-called X Date to arrive in early to mid-August.
The center’s estimate is also “roughly consistent” with the forecast provided by the Treasury Department when it announced last month that the nation had hit the $31.4 trillion debt ceiling, said Shai Akabas, the center’s director of economic policy.
At that time, Treasury Secretary Janet Yellen said that the department would start taking extraordinary measures to allow the federal government to continue paying its bills in full and on time. The effort would last through June 5, though she also noted that it’s unlikely that cash and extraordinary measures would be exhausted before early June. However, she stressed that there is “considerable uncertainty” around that forecast.
The projections give lawmakers and the Biden administration a sense of when they must reach an agreement on resolving the borrowing limit to avoid a catastrophic default. The forecasts are also meant to spur action, though little progress has been made so far.
Pinpointing the timing is difficult because it depends heavily on 2022 tax collections in April. The center, CBO and others expect to issue updated estimates in May when the revenue picture becomes clearer.
This tax season is particularly hard to predict because it follows strong 2021 collections, which were boosted by pandemic relief efforts, as well as a year of more persistent inflation and faster interest rate hikes by the Federal Reserve.
“There is significant revenue volatility, particularly given the state of the economy right now,” said Rachel Snyderman, the center’s senior associate director of business and economic policy.
The government is projected to shell out more than $3 trillion and collect about $2.5 trillion between February and June, according to the center. A shift of a few hundred billion dollars in either direction would affect the X Date.
Though the threat of default may not occur until the summer, Congress should not wait to address the issue, said Akabas, echoing repeated warnings from other budget experts and government officials.
But House Republicans and the White House have yet to find much common ground to settle their standoff over the borrowing cap. GOP lawmakers are demanding spending cuts in exchange for raising the debt ceiling, while President Joe Biden is calling on Republicans to negotiate on reducing spending without holding the debt ceiling hostage.
If the US defaults on its debt, there would be enormous consequences on the national economy, global financial stability and many Americans. A previous close call in 2011 prompted the stock market to decline, borrowing costs to rise and the nation’s credit rating to be downgraded.
Already, Treasury securities maturing within the X Date range are commanding higher rates.
“That’s because investors are ever so slightly more worried that those are not going to be made on time,” Akabas said. “I expect that those patterns will likely grow if we get closer without any resolution. And those are direct costs to taxpayers over time because those are interest costs that the United States has to pay.”