The Debt Limit in 2025: How Will Treasury Manage Cash on Hand

Next year, policymakers in Washington will once again confront the nation's debt limit. Its current suspension, initiated by the Fiscal Responsibility Act (FRA), ends at midnight on January 2, 2025.

One major factor in the Treasury Department's management of government finances during debt limit episodes is the cash it has on hand when a given debt limit suspension ends. The size of these cash reserves dramatically impacts the timing by which policymakers must act to avoid the worst economic outcomes that come with jeopardizing the full faith and credit of the United States. A recently released 2021 Department of Justice opinion sheds new light on how Treasury has managed its cash on hand in the leadup to recent debt limit episodes and what officials might do next year.

The X Date

Absent congressional action to raise or further suspend the debt limit, Treasury will begin using its existing cash on hand and extraordinary measures in early 2025. Because the federal government is running large annual deficits, those resources will quickly deplete and the U.S. will cross the X Date, the day on which the federal government is no longer able to meet all its obligations in full and on time. The ramifications of any missed payments could be severe. Even approaching the X Date has negative economic consequences.

Extraordinary Measures

Treasury's accounting maneuvers create additional room under the debt limit for Treasury to meet its financial obligations.

Treasury has a number of tools in its extraordinary measures toolkit, including pausing reinvestments in the Thrift Savings Plan Government Securities Investment Fund (G Fund) and the Exchange Stabilization Fund, whose securities mature daily. Treasury can also pause the crediting of interest income to the Civil Service Retirement and Disability Fund (CSRDF), and delay rollovers of maturing securities to the CSRDF.

Cash on Hand

Since 2011, Treasury's cash on hand has become an increasingly important determinant of when the X Date will arrive because Congress has generally shifted from raising the debt limit by a specified amount to suspending the debt limit for a specified period of time. From 1993 through 2011, Congress increased the debt limit 15 times and never suspended it. Since 2012, Congress has suspended the debt limit eight times and increased the debt limit just twice (both in 2021).

When Congress raises the debt limit, Treasury's net borrowing-and thereby its cash on hand-is directly constrained by that limit. In contrast, when a suspension ends, the debt limit is automatically increased by the amount of obligations the U.S. government has incurred during the suspension period.

Congress limits the increase to "necessary" obligations of the federal government during the suspension period. Several, but not all, recent debt limit suspensions have also prohibited Treasury from increasing their cash on hand balance "above normal operating balances in anticipation" of the end of the debt limit suspension period. (The FRA includes this language.)

Before 2021, "uncertainty" about the meaning of the statute led Treasury to draw down its cash balances to approximately match the cash on hand it at the beginning of a given suspension period. This level was often quite low, as policymakers often addressed the debt limit at the 11^th hour when Treasury's reserves were dwindling.

2021 Department of Justice Opinion

A July 8. 2021, Department of Justice (DOJ) legal opinion for Treasury, that was recently made public offers some indicators of how Treasury has thought about its cash-on-hand balance in the recent past. DOJ's Office of Legal Counsel (OLC) informed Treasury that it is allowed to maintain a "standard one-week cash balance, adjusted for uncertainty and risk," rather than drawing down its cash balances "considerably" as it had when earlier debt limit suspension periods neared an end. Consequently, Treasury had $459 billion in cash on hand at the beginning of 2021 extraordinary measures.

There is significant uncertainty regarding how much cash on hand Treasury will hold come January 2, 2025. Large differences in the amount of cash on hand could have a significant impact on the X Date range. For example, Treasury dramatically reducing its cash balance to $23 billion, the amount it had at the time of suspension (from approximately $700 billion as of early April 2024), would likely lead to an X Date before the influx of tax season revenues, whereas a much larger starting cash balance-as implied by the release of this OLC opinion-would mean an X Date further into the year, as reserves can cover the shortfall between spending and revenue for a longer period of time.

Updates and data releases later in the calendar year should provide more clarity about how much cash Treasury expects to have on hand come January 2, 2025.

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