Debt Ceiling

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What is a 'Debt Ceiling'

The maximum amount of monies the United States can borrow. The debt ceiling was created under the Second Liberty Bond Act of 1917, putting a "ceiling" on the amount of bonds the United States can issue. As of the end of July, 2011 the debt ceiling was set at $14.3 trillion.

Also known as the "debt limit" or "statutory debt limit."

BREAKING DOWN 'Debt Ceiling'

Before the debt ceiling was created, the President had free reign on the country's finances. In 1917, the debt ceiling was created during World War I to hold the President fiscally responsible. Over time, the debt ceiling has been raised whenever the United States comes close to hitting the limit. By hitting the limit and missing an interest payment to bondholders, the United States would be in default, lowering its credit rating and increasing the cost of its debt.

There has been controversy over whether the debt ceiling is constitutional. According to the 14th Amendment of the Constitution, "The validity of the public debt of the United States, authorized by law ... shall not be questioned." The majority of democratic countries do not have a debt ceiling, with the United States being one of the exceptions.

There has been a number showdowns over the debt ceiling, some of which has lead to government shutdowns. Usually the conflict is between the White House and Congress, and the debt ceiling is used as leverage to push budgetary agendas. In 1995, the republican congress — vocalized by the House Speaker Newt Gingrich — used raising the debt ceiling to negotiate increased spending cuts. President Clinton refused, which lead to the government shutting down. The White House and Congress eventually agreed on a balanced budget with modest spending cuts and tax increases.

President Obama faced similar issues during his terms. In 2011, Republicans in Congress demanded deficit reductions in order to approve an increase in the debt ceiling. During this time, U.S. Treasury debt was stripped of its triple-A rating by Standard&Poor's — a rating it had held for more than 70 years. In 2013, the government shut down for 16 days after conservative Republicans attempted to defund the Affordable Care Act by leveraging the debt ceiling. An agreement to suspend the debt limit was passed within a day of when the Treasury estimated to run out of money. The suspension will end March 15, 2017. 

See more: Treasury's Mnuchin to Congress: Raise Debt Ceiling