Next Year’s Debt Ceiling Expiration Could Become Tied to The Tax Debate

While the 2023 debt ceiling fight in Washington might still be fresh on investors’ minds, the U.S. debt ceiling expires again in 2025. The outcome of the election will be key to how the debt ceiling is resolved next year, and the tax policy debate could play into it.

When the federal government runs a deficit (i.e., spends more than it brings in), it borrows money to bridge the gap. It does so by issuing debt (e.g., Treasury bonds). Congress mandates how much debt the U.S. government can hold through a statutory debt ceiling. This debt ceiling can be amended through acts of Congress—since 1960, Congress has acted nearly 80 times to raise, temporarily extend, or revise the definition of the debt limit. In most cases, these debt ceiling increases were not controversial. However, this is not always the case. Both the deteriorating U.S. fiscal situation and narrow margins in Congress have raised the stakes on debt ceiling debates in recent years. 

Officially, the U.S. debt ceiling expires on January 1, 2025. However, there is a difference between the expiration date and the “X date,” which is when Treasury is actually at risk of default and which often comes months after the expiration date. Treasury aims to keep 5 days of expected gross outflows in its operating account (the Treasury General Account, or TGA) to make payments and handle deposits of taxes and tariffs. Once the debt ceiling expires, Treasury begins to spend down the funds in the TGA and to employ what are known as “extraordinary measures” to avoid issuing net new debt until Congress raises the debt ceiling. The “X date” is the day that Treasury runs out of TGA funds and extraordinary measures

In July, Treasury set a $700 billion target for the level of funds in the TGA for the end of 2024. Based on that, we esimate that the “X date” in 2025 will fall around August 31. The chart shows our estimate of the TGA spend-down in 2025, starting at $700 billion and reaching depletion at the end of August. It’s important to note that the August 2025 deadline is not set in stone. It could come sooner if Treasury spends down the TGA past its target and starts off 2025 with a smaller balance. It could also be pushed later into the year if tax revenues are better than expected.

Congress also faces a December 31, 2025 deadline to extend expiring tax cuts from the 2017 Tax Cuts and Jobs Act and expiring spending provisions. Depending on the party composition of Congress in 2025 and the timing of the “X date,” resolution of the debt ceiling could get tied into the tax debate. If one party controls both chambers of Congress, it will be easier for Washington to lift the debt ceiling without much fuss. However, in a divided government scenario, we could see a debt ceiling fight similar to the one we saw in 2023. We expect Republicans to push for spending cuts to be tied to a debt ceiling increase while Democrats will push for no conditions to be added to a measure to lift the debt ceiling.

The next president faces a difficult fiscal situation when he or she takes office in January. The U.S. deficit is around 7% of GDP with near full employment, the cost of servicing U.S. debt is at its highest level in 30 years, and entitlement spending is rising due to an aging population. At the same time, policymakers will be looking to extend at least some of the $4 trillion of tax cuts and spending programs that expire at the end of 2025, and they will be looking to increase defense spending due to growing geopolitical concerns. We have to wait until after the election to know how these issues will play out, but they are important to keep in mind as we look ahead to post-election policy decisions at the end of this year and next year.

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