The Congressional Budget Office (CBO) has once again sounded the alarm, warning that the federal government might run out of money to pay all its bills as early as August if lawmakers fail to raise or suspend the debt ceiling. Yes, the debt ceiling—America’s favourite political football—is back in the spotlight; this time, the stakes are higher than ever.

Since January 21, the Treasury has been employing its usual bag of accounting tricks to stay below the current debt ceiling of $36.1 trillion, which went into effect earlier this year. But the Treasury Department has been ominously silent about when exactly those tricks will run out.
“If the debt ceiling remains unchanged, the government’s borrowing capacity using extraordinary measures will likely be exhausted sometime between August and September 2025,” the CBO said in a statement on Wednesday. “The projected exhaustion date is uncertain because the timing and amount of revenues and outlays over the intervening months could differ from CBO’s projections.”

Now, here’s the kicker: if government borrowing needs turn out to be significantly higher than CBO’s forecasts, the Treasury’s resources could be drained as early as late May or June—before the crucial mid-June tax payments roll in or before additional extraordinary measures become available on June 30.

The CBO’s projections for the X-date give lawmakers a rough estimate of how much time they have to raise or suspend the debt ceiling to avoid a financial apocalypse. Naturally, Republicans in the House of Representatives are pushing to tie the debt ceiling increase to legislation aimed at enacting President Donald Trump’s top priority—extending his 2017 tax cuts, many of which expire at the end of this year.
Last month, the House took a step in that direction by passing a budget proposal that includes a $4 trillion debt ceiling increase. But as always, the real battle is in the Senate. On Tuesday, Senate Majority Leader John Thune said that “a consensus was forming” around including a debt limit provision in the tax plan through a so-called reconciliation bill, which Republicans could pass without Democratic votes. Whether that consensus will hold remains anyone’s guess.

According to CBO projections, a $4 trillion increase would relieve the government’s borrowing constraints for two to three years. However, with more significant budget deficits expected over the next two years, thanks in no small part to the extension of those Republican tax cuts, the government could hit that limit sooner rather than later.
Lawmakers are crossing their fingers that raising the borrowing capacity by $4 trillion will allow them to avoid another debt ceiling vote before the midterm elections. Because heaven forbid Congress does its job and addresses the underlying problem.

Everything hinges on tax receipts, with the April 15 tax filing deadline looming. House Ways and Means Committee Chairman Jason Smith has already warned that a debt ceiling breach could happen as early as mid-May if the Treasury brings in less revenue than expected.

What would happen if they don’t resolve their issues?

The most immediate consequence would be a default on U.S. debt, meaning the Treasury would be unable to make interest payments on its bonds. This would mark the first time in history that the U.S. has defaulted on its debt, leading to a significant crisis of confidence in U.S. Treasuries, considered the world’s safest assets. As a result, global financial markets would likely descend into chaos. Investors would flee from U.S. assets, selling off Treasuries, stocks, and even the U.S. dollar. The ensuing market crash could erase trillions of dollars of wealth worldwide.

Investors would demand higher yields to hold U.S. debt, significantly increasing the government’s borrowing costs. This cost increase would ripple through the economy, raising interest rates on everything from mortgages to car loans and corporate debt. Soaring interest rates, market panic, and declining investor confidence would likely push the U.S. into a deep recession.

Financial institutions often use Treasuries as collateral in a process called rehypothecation, which involves using collateral for multiple transactions. If the value of Treasuries becomes questionable, the entire chain of transactions could collapse, leading to a liquidity crisis.