The debt ceiling is a limit that Congress imposes on how much debt the federal government can carry at any given time. The amount is set by law and has been increased over the years to finance the government’s operations.
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 then must choose between paying federal employee salaries, Social Security benefits, or the interest on the national debt.
- The debt ceiling is a limit that Congress imposes on how much debt the federal government can carry at any given time.
- Congress must raise the debt ceiling in order for the U.S. to not default on its debt, and this happens often.
- When the debt ceiling is not raised, there can be several impacts, including an increase in interest rates, a decline in the dollar's value in the long term, and a general disruption to financial markets.
- While raising the debt ceiling is generally considered a non-issue, as it occurs often, continuing to raise the debt ceiling puts America further and further in debt.
Congress already knows how much it will add to the debt when it approves each year's budget deficit. When it refuses to 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, which is 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 a little less than the total outstanding U.S. debt recorded by the national debt clock.
It's also important to note that there are two types of U.S. debt. The first is what the government owes to itself, most of which is the Social Security Trust Fund and federal employee retirement funds. The debt that's owed to everyone else is the public debt, which covers the majority of all debts in the U.S.
Each time Congress passes a budget that exceeds the debt limit, the debt ceiling is automatically increased. However, the Senate or the president could still refuse to raise the debt ceiling.
Debt Ceiling History
Congress created the debt ceiling in the Second Liberty Bond Act of 1917. Initially, it allowed the Treasury Department to issue Liberty bonds so the United States could finance its World War I military expenses.
Generally, elected officials have a lot of pressure to increase the annual U.S. budget deficit, yet increases in the budget push the national debt higher and higher. There is not much incentive for politicians to curb government spending. They get reelected 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.
Why the Debt Ceiling Matters
Congress must raise the debt ceiling so the United States doesn't default on its debt, and this happens often. Since 1960, according to the U.S. Department of the Treasury, Congress has acted 78 separate times to permanently raise, temporarily extend, or revise the debt limit, as of September 2021. If you look at the debt ceiling history, you'll see that all parties and all members of Congress generally know when it is necessary.
The debt ceiling has been altered almost twice as much when there is a Republican president in power versus a Democratic president.
The debt ceiling really only has a strong impact when the president and Congress can't agree on fiscal policy, which has occurred in the past. It's a last resort to get attention by the non-majority in Congress, as they might have felt slighted by the budget process. As a result, they create a debt ceiling crisis.
Debt Ceiling Crisis 2013
While the debt ceiling is raised often, the process of raising it can often lead to disagreement among part leaders, and a possible government shutdown. One prominent example of note is the debt ceiling crisis of 2013.
In January 2013, Congress threatened not to raise the debt ceiling. It wanted to force the federal government to cut spending in the Fiscal Year 2013 budget. However, better-than-expected revenues meant the debt ceiling debate was postponed until the fall.
On Sept. 25, 2013, the Treasury Secretary warned that the nation would reach the debt ceiling on Oct. 17. Many Republicans said they would only raise the ceiling if funding for Obamacare were taken out of the fiscal year 2014 budget.
Then, on Oct. 1, 2013, the government shut down because Congress hadn't approved the funding bill. The Senate wouldn't approve a bill that defunded Obamacare, and the House wouldn't approve a bill that funded it. At the last minute, the Senate and House agreed upon a deal to reopen the government and raise the debt ceiling.
The Obama administration had reported that this government shutdown cost 120,000 jobs and slowed economic growth by as much as 0.6%.
On Oct. 17, 2013, Congress agreed to a deal that would let Treasury issue debt until Feb. 7, 2014. Government leaders are often met with the choice to raise the debt ceiling, and the effects differ depending on how quickly they come to a decision.
What Happens When 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.
Once the debt ceiling is reached, Treasury cannot auction new notes. In that case, it must rely on incoming revenue to pay ongoing federal government expenses. That happened in 1996 when the Treasury announced it could not send out Social Security checks, before Congress eventually intervened. Competing federal regulations make it unclear how Treasury should decide which bills to pay and which to delay.
When the U.S. is paying back debts, foreign owners could get concerned that they may not get paid. For reference, the U.S. debt to Japan is the largest, followed by debt to China.
If the Treasury did default on its interest payments, a few 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 might not receive their funds.
- Federal buildings and services would close.
Second, the yields of Treasury notes sold on the secondary market would rise, which would inevitably create higher interest rates. This would increase the cost of doing business and buying a home. It would also slow down economic growth.
Third, owners of U.S. Treasurys would dump their holdings, causing the dollar to plummet. The dollar’s drastic decline could eliminate its status as the world's reserve currency. Over time, the standard of living in America would decline. In this situation, the United States would find itself unable to repay its debt.
In September 2021 under President Biden, there was another case of Congress possibly not raising the debt ceiling. Moody Analytics released a report that stated that, if Congress fails to increase the debt limit and ultimately defaulted on its debt, "This economic scenario is cataclysmic ... The downturn would be comparable to that suffered during the financial crisis" of 2008.
What Happens When the Debt Ceiling Is Raised
Continuing to raise the debt ceiling puts America further in debt, and is part of the reason why America wound up with a $28 trillion debt. In recent years, the debt ceiling 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 default.
The long-term consequences, however, are severe. The paper-thin debt ceiling is apparently the only restraint on out-of-control government spending. A 2017 survey found that 57% of Americans said Congress should not raise the debt ceiling. Only 20% said it should be raised.
Generally, 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.
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, some scholars feel that level is around 77% 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.