What Is the U.S. Debt Ceiling?
The debt ceiling, legally known as the debt limit, is the total amount of money that the U.S. government is authorized to borrow to pay existing obligations, such as Social Security and Medicare benefits, military salaries, interest on the national debt, tax refunds, and disbursements for other programs.
The debt limit applies to federal debt held by the public, namely, securities held by investors outside the federal government, and to federal debt held by the government’s own accounts. The debt limit does not create new spending commitments but allows the government to finance existing obligations already established by Congress.
The debt limit is codified at Title 31 subsection 3101 of the U.S. Code and the current statutory debt limit is $14.694 trillion. The debt limit is administered by the Department of Treasury, who publishes a graph of debt subject to the limit.
History of the U.S. debt limit
Congress has the sole power to borrow money on the credit of the United States as authorized by Article I Section 8 of the U.S. Constitution. Until 1917, Congress authorized each debt issuance separately. In order to help finance the United States’ involvement in World War I, Congress passed the Second Liberty Bond Act of 1917, which also established a limit on the total amount of bonds that could be issued.
Congress broadened the limit to apply to all federal debt in 1939 and 1941 through the Public Debt Acts. Congress authorized the Department of the Treasury to issue such debt necessary to fund government operations (as authorized by the federal budget) as long as the total debt remained below a stated ceiling. According to the Treasury Department, since 1960, Congress has acted 78 times to raise, extend, or revise the definition of the debt limit – 49 times under Republican presidents and 29 times under Democratic presidents.
In the history of the debt limit, the U.S. has experienced one technical default. In 1979, Congress completed negotiations to raise the debt limit at the last minute. Subsequently, Treasury failed to redeem $120 million of Treasury bills on time due to unprecedentedly high interest from small investors, Congress’ delay in raising the debt limit and faulty word-processing equipment. The Treasury Department described this failure as a technological glitch and the investors were eventually paid in full.
In addition, the only time the debt limit has been numerically exceeded occurred December 16, 2009 when Treasury posted a national debt calculation of $12.135 trillion while the limit was $12.104 trillion dollars. Treasury utilized extraordinary accounting tools to meet federal obligations until Congress raised the limit to $12.4 trillion on December 24, 2009.
Consequences of failing to increase debt limit
If the debt limit is not raised, the United States will not have enough money to pay all of its obligations and will default. Most economists and financial experts observe that a failure to increase the debt limit and subsequent U.S. government default would have significant negative economic consequences.
The U.S. government would default on its legal obligations for the first time in American history.
Default could precipitate another financial crisis and threaten the jobs and savings of all Americans.
If the federal government interrupts payments, people like Social Security recipients or government contractors, will have less money to spend, causing the economy to slow down
Investors could demand a higher interest rate, causing the economy to slow down more and, perversely, worsening the deficit problem by increasing required interest payments on the debt
Interest rates could go up for credit cards and mortgages because the interest rates paid by corporations and consumers in the U.S. are tied to the rate the nation pays.
The special role of the dollar and Treasury securities in global markets would be damaged
Default would create fundamental doubts about U.S. creditworthiness.