When politicians were battling over the debt ceiling last summer, many Americans believed Congress wouldn’t let the country run out of cash and default. After all, both parties need to agree for the sake of the American people, and Treasury Secretary Janet Yellen was just a call away for advice. However, the situation might not be so certain come January when the 2023 debt ceiling suspension ends.
The U.S. government continues to spend eye-watering sums, but in early January 2025, the nation will also be coming out of an election—and the months after the last presidential race, in which Joe Biden replaced Donald Trump, couldn’t exactly be described as smooth.
As a result, the Bipartisan Policy Committee (BPC) is looking at its calendar and wondering which date will be marked with an ‘X’.
The ‘X Date’ is the day the U.S. hypothetically runs out of cash—when the Treasury department has exhausted all of its resources and the government has to default on its loans—and the BPC has it potentially penciled in for late 2025.
Many experts believe the situation is not so dire at this stage that the U.S will default—America is too big and too powerful for that to happen.
But the experts Fortune spoke to said politicians are playing an annual game of chicken, with Wall Street and the global financial markets being left to pick up the tab.
And while the debt ceiling is not likely to come crashing down imminently, it’s a cliff precipice that congress is increasingly edging towards.
A cherry on top
“The debt limit is the metaphorical cherry on top of economic uncertainty driven by fiscal policy,” said Shai Akabas, BPC’s executive director of economic policy.
He warned that without a confirmed Treasury Secretary next year (in the event of a Trump victory), the department might face an extremely precarious situation.
Federal borrowing is expected to hit $243 billion this quarter, with a net $847 billion between July and September.
This fuels concerns about the long-term impact of America’s fiscal outlook.
The Congressional Budget Office estimates the debt-to-GDP ratio will reach 166% by 2054, hitting $141.1 trillion.
For Columbia University professor Brett House, these conversations have risen to the top of the agenda because of the election timing—not because the U.S. is any more likely now than in the past to hit the ‘X date.’
“Congress has neither become more or less functional in many aspects with respect to budget,” he told Fortune.
“Could the car crash? It absolutely could. Do I think it’s likely to do so? No. At past points both congress and the White House have managed to come together to make sure the necessary is done, but the bigger issue is that this is a continual habitual state where every year to two years we keep revisiting these choke points in the budget.”
This cycle of panic ultimately “chips away at the credibility of [U.S.] political and policy process and ultimately dents the attractiveness of American debt and the American dollar,” he added.
Increasing divergence
While Andrew Lautz, associate director of economic policy at the BPC, agrees with House that the U.S. is unlikely to reach the X date next year, he is increasingly concerned by the growing rift between Republicans and Democrats—and the issues this could create in the future.
“We are seeing an increasing divergence,” Lautz told Fortune from the think tank’s base in Washington D.C.
“Congress is spending more time than it did in prior decades on the very basics of governing: addressing the debt limit, funding the government on an annual basis. We have these regular threats of shutdown. These should be relatively basic aspects of governing when you compare it to the much larger aspects of managing our $34 trillion national debt.”
This in-fighting is creating unnecessary “jitters” on a regular basis in domestic and global financial markets, Lautz added.
“There’s fighting between the two parties… down to the last minute and the jitters grow even greater on domestic financial markets. Usually at the last moment—or far too close to the X Date for comfort—there’s a resolution,” he said.
Indeed, last spring Citigroup CEO Jane Fraser said down-to-the-wire debt ceiling negotiations were “more worrying” than previously, while JPMorgan’s Dimon said the bank began convening weekly meetings on the implications of any fallout if a deal wasn’t reached.
Elsewhere Morgan Stanley noted the S&P 500 “struggled” in the weeks around the debt ceiling debate, only making marginal returns of 0.4%.
“Much like some of the other challenges facing the world right now, it feels like a slow-moving crisis right now, but it’s hard to know when it becomes a fast-moving crisis,” Lautz added.
Time for a change
A recurring standoff with the American economy on the line isn’t an experiment House or Lautz want to see repeated—but they warn that experts should be careful about pushing for change without details of what that will look like.
“We have not allowed ourselves to cross the X Date before,” Lautz said. “Despite the wide gap between Republicans and Democrats on the general direction of spending and taxes in this country they have—even if it’s at the last minute or close to the last second—come together time and again to avoid catastrophe.
“But that bar is low—we need to do a lot better than just avoid catastrophe. We consider a number of things: trajectory, budget process, political infighting, all of them unsustainable,” he finished.
However, Columbia’s House points out that while experts should question spending, they need to be prepared to offer solutions.
“There are very good reasons for the state we find ourselves in,” he said. “It’s all well and fine to have broad conversations around setting the fiscal balance, but we need to be very specific about what it is [we] propose to cut or which tax to raise.”
The likes of the Penn Wharton Budget Model at the University of Pennsylvania’s Wharton School have offered up some options.
In late April, it offered options by way of fiscal ‘bundles’—ranging from raising corporation tax to broad changes in social security and medicare through to exploring new tax revenue streams.
Luckily, the BPC says there’s already good work going on behind the scenes across parties to begin solving these problems.
And Lautz added there’s motivation for politicians to get the job done: “Policymakers in both parties, most of them acknowledge this is unsustainable. Maybe it is a crisis in the financial markets down the line: maybe it’s a year, maybe it’s five, maybe it’s 50—it’s impossible to project. But almost every economist, policymaker and analyst will tell you we can’t continue on this path.”
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