U.S. Debt Ceiling: Current Status and Looming Crisis

Debt Ceiling Raised Until December 8, 2017

US Capitol Interior
Ceiling of the U.S. Capitol, where the debt ceiling is set and hopefully raised. Photo: Vito Palmisano/Getty Images

Definition: The debt ceiling is a limit that Congress imposes on how much debt the federal government can carry at any given time. When the ceiling is reached, the U.S. Treasury Department cannot issue any more Treasury bills, bonds or notes. It can only pay bills as it receives tax revenues. If the revenue isn't enough, the Treasury Secretary must choose between paying federal employee salaries, Social Security benefits or the interest on the national debt.

 

The nation's debt limit is similar to the limit your credit card company places on your spending. But there's one significant difference. Congress is in charge of both its spending and the debt limit. It already knows how much it will add to the debt when it approves that year's budget deficit. When it refuses increase the debt limit, it's saying it wants to spend but not pay its bills. That's like your credit card company allowing you to spend above its limit and then refusing to pay the stores for your purchases. 

Congress imposes the debt ceiling on the statutory debt limit. That's the outstanding debt in U.S. Treasury notes after adjustments. The adjustments include unamortized discounts, old debt and guaranteed debt. It also includes debt held by the Federal Financing Bank. The statutory debt limit is just a little less than the total outstanding U.S. debt recorded by the national debt clock.

The U.S. debt consists of two types of debt. The first is what the government owes to itself. Most of that is the Social Security Trust Fund and federal employee retirement funds.The debt that's owed to everyone else is the public debt. It's 70 percent of the total debt.

Current Status

On September 8, 2017, President Trump signed a bill increasing the debt ceiling to December 8, 2017.

Later that day, the debt exceeded $20 billion for the first time in U.S. history.

The bill also approved $15.25 billion in relief funds for the victims of Hurricane Harvey and Hurricane Irma. It included an extension of government spending to December 8 as well. Without a debt ceiling increase, the U.S. Treasury does not have enough to disburse the funds to FEMA. (Source: "Trump Signs Debt Limit Suspension Tied to $15 Billion Storm Aid," Bloomberg, September 8, 2017.)

On September 6, 2017,  Trump and Congressional Democratic leaders agreed to raise the debt ceiling until mid-December. Senate Majority Leader Mitch McConnell, R-Ky., and House Speaker Paul Ryan, R-Wis., wanted to raise the ceiling without any restrictions. (Source: "Trump Agrees to Raise Debt Ceiling Until December," Politico, September 6, 2017.)

That means Congress must approve a new debt ceiling and create a new budget by December 8. That will create a situation like the 2012 fiscal cliff crisis. (Source: "Congress Must Raise Debt Ceiling While Approving Harvey Aid," CNN Money, September 3, 2017.)

The House Freedom Caucus was furious. It wanted to impose a $1.5 trillion restriction. That would be enough to get the government through the 2018 midterm election.

It also wanted guarantees that the administration would cut the debt before allowing a ceiling increase. These include spending cuts and an assurance that debt repayment is the highest priority. (Source: "GOP Clash Looms Over Raising Debt Ceiling," Politico, August 3, 2017. "Freedom Caucus Eyeing $1.5 Trillion Debt Ceiling Increase," Politico, June 13, 2017.)

Congress needed to raise the ceiling before October 3, 2017. Otherwise, the federal government would have defaulted on 25 percent of its bills for that month. Congress suspended the debt ceiling on November 2, 2015, when it passed the Bipartisan Budget Act of 2015, Pub. L. 114-74. It remained suspended until March 15, 2017. That means the Treasury Department cannot allow the statutory debt limit to go one penny higher than the $19.808 trillion it was on that day.

 (Source: "The Debt Ceiling Deadline Has Passed," Zero Hedge, March 17, 2017.)

Since March 2017, the Treasury has been raiding federal pension funds to keep from issuing new debt. It will run out of these extraordinary measures in early September. It can use incoming tax receipts to stay afloat until the October 3 cutoff date.

Debt Ceiling 2015

On February 11, 2014, House Speaker John Boehner passed a bill to suspend the debt ceiling until March 15, 2015. The debt ceiling would automatically become the level of the debt at that point in time. The bill approved without any attachments, riders or insistence that Obamacare be defunded. He didn't have 218 Republican votes to do so. Instead, he passed it with 193 Democrats and 28 Republicans.

Tea party Republicans in the House called it a "...complete capitulation on the Speaker's part and demonstrates that he has lost the ability to lead the House of Representatives." They and Senator Ted Cruz were the only ones who thought the threat of a debt default was a useful tool to force the government to cut spending. But there weren't enough of them to wield this ax. (Source: "Boehner Says House to Pass Clean Debt Limit Hike," Fox News, February 22, 2014.)

On March 15, 2015, the nation reached the debt ceiling of $18.113 trillion. In response, the Treasury Secretary stopped issuing new debt. He took extraordinary measures to keep the debt from exceeding the limit. For example, he stopped payments to federal employee retirement funds. He also sold investments held by those funds. He kept the debt under the limit until Congress passed the Budget Act on November 15. (Source: “Report on Fund Operations and Status,” Department of the Treasury, January 29, 2016. "Meet the New Debt Ceiling," CNN Money, March 17, 2015.)

Debt Ceiling History

Congress created the debt ceiling in the Second Liberty Bond Act of 1917. It allowed the Treasury Department to issue Liberty bonds so the U.S. could finance its World War I military expenses. These longer-term bonds had lower interest payments than the short-term bills Treasury used before the Act. Congress now had the ability to control overall government spending for the first time. Before that, it had only issued authorization for specific debt, such as the Panama Canal or other short-term notes. (Source: “The Debt Limit: History and Recent Increases,” CRS Report for Congress, 2008.)

This is no longer necessary. In 1974, Congress created the budget process that allows it to control spending. That's why Congress usually raises the debt ceiling. When the budget process works smoothly, both houses of Congress and the President have already agreed on how much the government will spend. There's no need for a debt ceiling. It merely allows the government to borrow money to pay the bills it has already approved. (Source: "1974 Budget Control Act," University of California Berkeley.) 

Elected officials have a lot of pressure to increase the annual U.S. budget deficit. Increases in the budget  pushes the national debt higher and higher. That's because there is not much incentive for politicians to curb government spending. They get re-elected for creating programs that benefit their constituency and their donors. They also stay in office if they cut taxes. Deficit spending does, in general, create economic growth

When the Debt Ceiling Matters

Congress must raise the debt ceiling so the United States doesn't default on its debt. That usually isn't a problem. In fact, during the last 10 years, Congress increased the debt ceiling 10 times. It raised it four times in 2008 and 2009 alone. If you look at the debt ceiling history, you'll see that Congress usually thinks nothing of raising it.

The debt ceiling only matters when the president and Congress can't agree on fiscal policy.  That occurred in 1985, 1995-1996, 2002, 2003, 2011 and 2013. It's a last resort to get attention by the non-majority in Congress. They might have felt slighted by the budget process.

For example, in January, 2013, Congress threatened not to raise the debt ceiling to force the federal government to cut spending in the Fiscal Year 2013 budget. Its position was that one dollar of spending should be cut for every dollar the debt ceiling was raised. President Obama replied he would not negotiate since the debt was incurred to pay bills that Congress already approved. Fortunately, better-than-expected revenues meant the debt ceiling debate was postponed until the fall. (Source: “Debt Ceiling Postponed,” Atlanta Blackstar, January 23, 2013.)

On September 25, 2013, Lew first warned that the nation would reach the debt ceiling on October 17. Many Republicans said they would only raise the ceiling if funding for Obamacare were taken out of the FY 2014 budget. At first, it looked like Boehner would pass a debt ceiling override without them. He didn’t want Republicans to be blamed for another fiasco like the 2011 debt crisis. Then he changed his mind.

On October 1, 2013, the government to shut down because Congress hadn't approved the funding bill. The Senate wouldn't approve a bill that defunded Obamacare. The House wouldn't approve a bill that funded it. Boehner announced he wouldn't raise the debt ceiling unless Democrats agreed to negotiate cuts in mandatory programs, such as Medicare, Medicaid and Obamacare. President Obama wouldn't negotiate a budget until the House approved a funding bill and raised the debt ceiling. At the last minute, the Senate and House agreed upon a deal to reopen the government and raise the debt ceiling. For more, see Government Shutdown.

On October 17, 2013, Congress agreed to a deal that would let Treasury issue debt until February 7, 2014. If it hadn't, the United States would have defaulted on its debt for the first time in its history.

The debt ceiling and government spending can also become a concern if the debt to gross domestic product ratio gets too high. According to the International Monetary Fund, that level is 77 percent for developed countries. When debt to GDP ratio rises too high, debt owners become concerned that a country can't generate enough revenue to pay the debt back. 

What Happens If the Debt Ceiling Isn't Raised?

As the debt approaches the ceiling, Treasury can stop issuing notes, and borrow from its retirement funds. These funds exclude Social Security and Medicare. It can withdraw around $800 billion it keeps at the Federal Reserve bank. 

Once the debt ceiling is reached, Treasury cannot auction new  notes. It must rely on incoming revenue to pay ongoing federal government expenses. That happened in 1996 when Treasury announced it could not send out Social Security checks. Competing federal regulations make it unclear how Treasury could decide which bills to pay and which to delay. Foreign owners would get concerned that they may not get paid. See What Is the U.S. Debt to China?

If Treasury did default on its interest payments, three things would happen. First, the federal government could no longer make its monthly payments. Employees would be furloughed and pension payments wouldn't go out. All those receiving Social Security, Medicare and Medicaid payments would go without. Federal buildings and services would close. 

Second, the yields of Treasury notes sold on the secondary market would rise. That would create higher interest rates. This would increase the cost of doing business and buying a home. It would slow down economic growth.

Third, owners of U.S. Treasurys would dump their holdings. That would cause the dollar to plummet. The dollar’s drastic decline could eliminate its status as the world's reserve currency. The standard of living in America would decline. In this situation, the United States would find itself unable to repay its debt.

For all these reasons, Congress shouldn't monkey around with raising the debt ceiling. If members are concerned about government spending, they should get serious about adopting a more conservative fiscal policy long before the debt ceiling needs to be raised. 

What Happens When the Debt Ceiling Is Raised?

Continuing to raise the debt ceiling is how America wound up with a $19 trillion debt. The debt ceiling has become a joke. It has become more like a speed limit sign that is never enforced. In the short-term, there are positive consequences to raising the debt ceiling. America continues to pay its bills. Consequently, it has avoided a total debt crisis. 

The long-term consequences are severe. That's because the paper-thin debt ceiling is apparently the only restraint on out-of-control government spending. A 2017 survey found that 57 percent of Americans said Congress should not raise the debt ceiling. Only 20 percent said it should be raised. But they don't want their taxes raised or their services cut. (Source: "Morning Consult National Tracking Poll #170604, " Morning Consult/POLITICO,  June 19, 2017.)

"Many people seem to want to cut down the forest but to keep the trees," according to Humphrey Taylor, Chairman of Pollster Harris Interactive. The majority of those interviewed don't want to see cuts to health care, Social Security and education. Health care and Social Security are two of the largest budget items. They do want to see cuts in foreign aid which is one of the smallest budget items.  They also want to see cuts to overseas defense spending which is one of the largest budget areas. They are saying "Cut programs that send my tax dollars overseas, and keep programs that help me personally."

The debt ceiling is good in that it creates a crisis that focuses national attention on the debt. Raising it is a necessary consequence of management by crisis.