Dom’s Quick Take: CBO, Treasury Warn ‘X-Day’ Could Be in Early June

The US Treasury could run out of cash in early June, according to a warning today from the director of the Congressional Budget Office (CBO, an independent agency that analyzes the Congressional budget process).

In February, the CBO expected the exhaustion date (known as ‘X-Day’) to happen during July-September. The reasons for the revision are that tax payments are running lower than the CBO expected in February (Chart 1). In addition, due to the cleared backlog at the IRS, the CBO now expects the IRS to process relatively few tax payments in May.

The shortfall is mainly with personal income tax collection, as corporate income tax seems on target. In addition, the decline in personal income tax has happened even though nominal household income has been growing steadily (Chart 2).

The CBO further added that uncertainty on revenue collections and outlays implied that the Treasury could experience periodic cash shortfalls through May even if X-Day turns out to be in early June.

The CBO is due to provide a detailed update of its February estimate of the FY 2023 budget deficit and X-Day on 12 May. It provided the information today ‘in response to questions from lawmakers’.

In parallel to CBO Director Swagel, Treasury Secretary Yellen stated in a letter sent to Congressional leaders today that ‘we will be unable to continue to satisfy all of the government’s obligations by early June, and potentially as early as June 1’.

House Speaker McCarthy got the House to approve on 26 April, by a majority of two, a bill that raised the debt ceiling in exchange for deep expenditure cuts.  The administration has refused to enter negotiations with the GOP over the bill and instead has argued that Congress should raise the ceiling unconditionally.

Today’s CBO blog post and Yellen’s letter set the stage for an early resolution of the impasse.  On the administration side, the Democrats remain stung by the 2011 debt ceiling crisis when they had to agree to spending cuts. On the Republican side, Speaker McCarthy will struggle to keep his party unified. This suggests resolution through brinkmanship and possibly technical default.

Dominique Dwor-Frecaut is a macro strategist based in Southern California. She has worked on EM and DMs at hedge funds, on the sell side, the NY Fed , the IMF and the World Bank. She publishes the blog Macro Sis that discusses the drivers of macro returns.

Photo Credit: depositphotos.com

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