INSIGHTi
The Debt Limit in 2021
Updated July 30, 2021
Debt limit episodes—which can be defined as starting when the statutory limit on federal debt restricts
some of the U.S. Treasury’s normal debt operations and ending when new legislation to modify the limit
is enacted—have been a recurrent federal fiscal feature in the past two decades. Since 2002, the debt limit
has been modified 18 times. The Bipartisan Budget Act of 2019 (P.L. 116-37), enacted in August 2019,
suspended the debt limit through July 31, 2021.
Recent debt limit episodes share similarities, although the issue in 2021 has a few unique characteristics.
First, the COVID-19 pandemic remains a source of economic uncertainty, and the fiscal responses it
spurred have accelerated the pace of federal debt accumulation. Second, the U.S. Treasury sharply
increased its cash balances in 2020 to accommodate those fiscal responses. Third, since 2015, Bipartisan
Budget Acts that adjusted statutory caps on discretionary spending imposed by the Budget Control Act of
2011 (BCA; P.L. 112-25) also suspended the debt limit. The expiration of those discretionary spending
caps at the end of FY2021 rendered moot the need for legislation to modify them. Thus, the legislative
vehicle used for the past few debt limit modifications is unavailable in 2021.
Federal Debt and the Debt Limit
When in force, the debt limit covers over 99% of federal debt. Federal debt grows when outlays exceed
revenues and when the federal credit balance sheet expands. Federal debt outstanding in mid-July 2021
totaled about $28.5 tril ion. Most of that debt—$22.3 tril ion—is held by the public, including $5.1
tril ion in Federal Reserve holdings. Another $6.2 tril ion is held as intragovernmental debt, mostly in
various federal trust funds such as Social Security and federal retirement programs, which hold special
Treasury securities that can be redeemed later to pay program expenses.
The Treasury Secretary and Extraordinary Measures
On Monday, August 2, 2021, the debt limit wil be reset to a level accommodating federal financial
commitments since the current suspension began. Treasury Secretary Janet Yel en recently informed
Congress that federal debt then would be at its limit and that she would invoke authorities to use
“extraordinary measures.” The Treasury Secretary can invoke those measures by declaring a “debt
issuance suspension period” that al ows the U.S. Treasury to suspend investments in Civil Service and
U.S. Postal Service retirement funds to help meet other federal obligations. Federal financial operations
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then continue normal y, although debt limit restrictions complicate Treasury’s debt and cash management.
Once a debt limit episode is resolved, Treasury must report on how it used extraordinary measures.
Treasury Cash Balances
During a debt limit episode, Treasury can pay obligations as long as it retains borrowing capacity, cash
balances, and funds available through its extraordinary measures. Treasury’s cash balances are now much
higher than a decade ago, as Figure 1 shows. Before the Lehman Brothers investment bank collapsed in
September 2008, Treasury cash balances were kept to minimal levels. Balances then fluctuated at levels
mostly below $100 bil ion, although low interest rates reduced the opportunity cost of holding cash.
Figure 1. Treasury Cash Balances, $Billions, FY2006-FY2021
Source: CRS calculations based on U.S. Treasury’s Daily Treasury Statement. Levels are weekly averages of cash balances of
the U.S. Treasury’s Federal Reserve Account.
In 2015, a Treasury advisory committee recommended increasing cash balances to cover an average
week’s outlays as a precaution against financial disruptions on the scale of those following the September
11, 2001, attacks or 2012’s Hurricane Sandy. Cash balances rose sharply after the March 2020 declaration
of COVID-19 as a pandemic, as then-Treasury Secretary Steven Mnuchin acted to enable rapid
disbursement of CARES Act (P.L. 116-136) payments. Treasury states that cash balances wil be brought
down to $450 bil ion when the debt limit suspension expires at the end of July 2021. At the end of July
27, 2021, Treasury’s cash balance was $565 bil ion.
How Long Can Treasury Pay Federal Bills?
At some point, Treasury’s cash balances and borrowing capacity wil be exhausted, implying that some
federal obligations could not be paid on time, unless the debt limit were modified. Predicting when that
might occur is especial y hard in 2021. Economic recovery and growth in government revenues is rapid,
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although subject to “elevated” levels of uncertainty, according to the Federal Reserve. About $1.5 tril ion
in COVID-related budgetary resources remains unspent, which may heighten uncertainty on the pace of
federal outlays. The gap between outlays and revenues—that is, the deficit—is at historical y high levels
in FY2021 (Figure 2).
Secretary Yel en wrote to congressional leaders on July 27, 2021, that the U.S. Treasury had suspended
issuing State & Local Government Series (SLGs) securities and would undertake other extraordinary
measures at the start of August 2021. She also noted that the Treasury could not give an estimate of how
long those measures would suffice to meet federal financial obligations due to the “considerable
uncertainty” about coming outlays and receipts. Secretary Yel en had testified that absent action on the
limit, default could become a serious risk by sometime in August 2021.
The Congressional Budget Office projected that Treasury “most likely” would exhaust its cash reserves in
October or November. According to a Goldman Sachs estimate (available to congressional clients from
this Insight’s author upon request), the debt limit would need to be raised by early October. Another
projection (also available to congressional clients upon request) tentatively suggested that Treasury could
continue regular payments into November 2021, but noted the possibility that at the start of October 2021
Treasury’s “margin for error would start to narrow dramatical y.”
Figure 2. Federal Outlays and Receipts As a Percentage of GDP, FY1962-FY2026
Source: CRS calculations based on Office of Management and Budget (OMB), Congressional Budget Office (CBO), and
Bureau of Economic Analysis (BEA) data and projections. FY2021-FY2026 outlay and revenue projections reflect
Administration proposals. Gross domestic product (GDP) projections are from CBO’s July 2021 budget update.
Congressional Options
Congress has used different means to control federal debt at different times. Since February 2013,
Congress has suspended the debt limit several times. The Bipartisan Budget Acts of 2015 (BBA 2015;
P.L. 114-74), 2018 (BBA 2018; P.L. 115-123), and 2019 (BBA 2019; P.L. 116-37) each suspended the
debt limit and adjusted statutory caps on discretionary spending then in place upward, among other
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provisions. Those caps on discretionary budget authority, set in the BCA, expired at the end of FY2021,
although sequestration of nonexempt mandatory spending has been extended.
In the decades before 2013, debt limit legislation typical y specified a set dollar amount on outstanding
debt. In 2011, the Budget Control Act al owed for three increases in the debt limit, with two subject to
congressional resolutions of disapproval. Congress has at times passed stand-alone debt limit measures
and, at other times, has packaged debt limit modifications with other provisions.
Author Information
D. Andrew Austin
Analyst in Economic Policy
Disclaimer
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