The Treasury Department on Wednesday made its perennial plea to lawmakers for timely action to avoid hitting the nation’s borrowing cap, after which the agency would only be able to finance government operations out of cash on hand and whatever tax receipts come in each day.
But Treasury is projecting that the cash balance will still be unusually large by the end of July, when the current debt ceiling suspension lapses. Combining that with accounting maneuvers known as “extraordinary measures,” some experts say the agency could make it deep into the fall before reaching the “drop dead” date for action.
“I don’t have a hard number right now, but I’m going to say it could take them to the middle of the fourth quarter,” said Lou Crandall, chief economist at Wrightson ICAP, an investment research firm that analyzes Treasury financing. “Let’s just say well into the fourth quarter.”
Earlier this week, Treasury said in its quarterly borrowing update that it expects to have a cash balance of $450 billion at the end of July, which is more than $300 billion above where Crandall and other analysts expected it to be based on prior debt ceiling suspensions.
In recent laws postponing the debt limit from taking effect, Congress has added language barring Treasury from borrowing more than was necessary to pay for federal programs and from “increasing the cash balance above normal operating balances in anticipation of the expiration” of a debt ceiling suspension period.
The combined effect of those two stipulations has typically been that Treasury will end the debt ceiling suspension period with no more cash on hand than it started with when the law was enacted, which in this case would have been roughly $130 billion.
But in the most recent extension, enacted under Democratic control of the House on Aug. 2, 2019, the second part of that statutory provision, dealing with higher than “normal operating balances,” was omitted.
At the time, Crandall wrote earlier this week, he thought that was just removing redundant language and that Treasury wouldn’t interpret it as “the rules governing the debt ceiling endgame had changed.” But he wrote in his weekly newsletter Monday that “a more flexible interpretation of the no-excess-borrowing guidelines would be reasonable and would also be fully consistent with Congressional intent.”
Treasury’s prior forecast, in February, anticipated it would have $500 billion in cash left at the end of June, which didn’t preclude the possibility of draining that balance down to around $130 billion by the end of July. That left some analysts thinking the intent was still to comply with the traditional rules against carrying excess cash balances into the end of a debt limit suspension period.
The Bipartisan Policy Center, a think tank, had estimated that what it calls the “x date,” when Congress would have to act or Treasury could run out of funds to pay for all its obligations, would hit in late summer or early fall. But Shai Akabas, the BPC’s director of economic policy, said Wednesday that Treasury’s cash balance estimate “dramatically changes our assumptions and will push the timeframe back.”
On Thursday, the BPC released an updated forecast saying the "x date" is now more realistically sometime after Oct. 1.
Akabas concurred with Crandall’s earlier assumption that Treasury wouldn’t dismiss the need to get the cash balance back down, despite the language being left out of the 2019 law. But he said Wednesday that perhaps it was intentional on the part of lawmakers to give Treasury more flexibility.
That would be prescient lawmaking indeed, because there’s no doubt Treasury under the Trump administration began building up a massive cash stockpile once the COVID-19 pandemic lockdowns began — irrespective of any debt limit anticipation.
The cash balance reached as high as $1.78 trillion last October; a typical amount is around $400 billion, by comparison. And due to slower-than-expected spending even after several huge coronavirus relief packages, Treasury still has abnormally high levels of cash on hand — $945 billion as of Tuesday.
That’s reduced the amount of new borrowing necessary so far this fiscal year, though the agency expects to sell another $1.3 trillion in debt over the next six months to cover new spending from pandemic relief packages. That’s not counting any new obligations associated with pricey bills President Joe Biden wants Congress to pass, for infrastructure, child care and more.
While lawmakers may have until late in the year to act on the debt limit, that doesn’t mean they’ll wait that long. Top Democrats are eyeing this summer or early fall for passage of Biden's infrastructure and other proposals, possibly using budget reconciliation procedures that can skirt a Senate GOP filibuster. Under federal budget law, the debt ceiling can be raised as part of that process.
And Treasury certainly doesn’t want to leave anything to chance with the debt ceiling. If just one payment is missed, particularly to government bondholders, the pristine U.S. credit rating could take a hit and drive up interest rates.
In a statement Wednesday, Treasury Deputy Assistant Secretary for Finance Brian Smith warned about the uncertain outlook and the potential that “extraordinary measures” could be exhausted faster than in the past.
“In light of the substantial COVID-related uncertainty about receipts and outlays in the coming months, it is very difficult to predict how long extraordinary measures might last,” Smith wrote. He said the Treasury is “evaluating a range of potential scenarios, including some in which extraordinary measures could be exhausted much more quickly than in prior debt limit episodes.”
White House Press Secretary Jen Psaki told reporters Wednesday that the Biden administration expects lawmakers to act “in a timely manner to raise or suspend the debt ceiling, as they did three times on a broad, bipartisan basis during the last administration,” including in 2017, when Republicans passed a $2 trillion tax cut measure.
Crandall said that after the debt limit resets on Aug. 1, based on the amount of debt that has accumulated since 2019, the full amount of extraordinary measures will be available to allow the Treasury to continue to borrow money and pay bills without exceeding the debt ceiling.
Extraordinary measures typically involve things like not fully investing federal employees’ Thrift Savings Plan and civil service retirement plan funds in special Treasury securities. After the debt ceiling is raised or suspended, those investments resume and lost interest is credited back to the accounts, leaving workers’ savings plans unaffected.
At the same time, Crandall said the extraordinary measures will be consumed more quickly than in the past because of high deficits. “It is still the case that the operating deficit is at historic highs, and so that cash will get chewed up faster week by week than is the norm,” he said.
Smith is “exactly right that because of the huge volume of pending support payments out there, that they will exhaust extraordinary measures at a faster dollar-per-day rate than they have in the past, just because the operating deficit is so large,” Crandall said. “On the other hand, they’re going to start out with a lot more resources than I thought because they will have $450 billion at the end of July, plus the standard extraordinary measures playbook.”
Crandall said Treasury’s decision to end the suspension with a higher balance “isn’t being driven by a desire to push back the drop-dead date.”
The Treasury adopted a higher precautionary cash balance guideline even predating the pandemic, when Barack Obama was president. “If you think that’s important in general, you think it’s extremely important right now because of the historic level of uncertainty about the timing of cash outflows,” Crandall said.
David Lerman contributed to this report.