What Is the 2011 U.S. Debt Ceiling Crisis?
The 2011 U.S. Debt Ceiling Crisis was a contentious debate in Congress that occurred in July 2011 regarding the maximum amount of debt the federal government should be allowed.
- The 2011 U.S. Debt Ceiling Crisis was one of a series of recurrent debates over increasing the total size of the U.S. national debt.
- In 2008, the federal budget deficit stood at $458.6 billon, which widened to $1.4 trillion the following year as the government spent heavily to boost the economy.
- To resolve the crisis, Congress passed a law that increased the debt ceiling by $2.4 trillion.
Understanding the 2011 U.S. Debt Ceiling Crisis
The federal government has rarely achieved a balanced budget, and its budget deficit ballooned following the 2007-08 Financial Crisis. In the 2008 fiscal year, the deficit stood at $458.6 billon, widening to $1.4 trillion in 2009 as the government engaged in a massive fiscal policy response to the economic downturn.
Between 2008 and 2010, Congress raised the debt ceiling from $10.6 trillion to $14.3 trillion. In 2011, as the economy showed early signs of recovery and federal debt approached its limit once again, negotiations began in Congress to balance spending priorities against the ever-rising debt burden.
Heated debate ensued, pitting proponents of spending and debt against fiscal conservatives. Pro-debt politicians argued that failing to raise the limit would require immediate cuts to spending already authorized by Congress, which could result in late, partial, or missed payments to Social Security and Medicare recipients, government employees, and government contractors.
Moreover, they asserted the Treasury could suspend interest payments on existing debt rather than withhold funds committed to federal programs. The prospect of cutting back on already promised spending was labeled a crisis by debt proponents.
On the other hand, the specter of a technical default on existing Treasury debt roiled financial markets. Fiscal conservatives argued that any debt limit increase should come with constraints on the growth of federal spending and debt accumulation.
Outcome of the 2011 U.S. Debt Ceiling Crisis
Congress resolved the debt ceiling crisis by passing the Budget Control Act of 2011, which became law on August 2, 2011. This act allowed the debt ceiling to be raised by $2.4 trillion in two phases, or installments.
In the first phase, a $400 billion increase would occur immediately, followed by another $500 billion unless Congress disapproved it. The second phase allowed for an increase between $1.2 trillion and $1.5 trillion, subject to Congressional disapproval as well. In return, the act included $900 billion in slowdowns in planned spending increases over a 10-year period. It also established a special committee charged with finding at least $1.5 trillion in additional savings.
In effect, the legislation incrementally raised the debt ceiling from $14.3 trillion to $16.4 trillion by January 27, 2012.
Following the passage of the act, Standard & Poor's took the radical step of downgrading the United States long-term credit rating from AAA to AA+, even though the U.S. did not default. The report says, "The downgrade reflects our opinion that the fiscal consolidation plan that Congress and the Administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government's medium-term debt dynamics." The credit rating agency cited the unimpressive size of deficit reduction plans relative to the likely future prospects for politically driven spending and debt accumulation.
Debt Approval Process Leading to the 2011 U.S. Debt Ceiling Crisis
The U.S. Constitution gives Congress the power to borrow money. Before 1917, this power was exercised by Congress authorizing the Treasury to borrow specified amounts of debt to fund limited expenses, such as war-time military spending, which would be repaid after the end of hostilities. This kept the national debt directly linked to authorized spending.
In 1917, Congress imposed a limit on federal debt as well as individual issuance limits. In 1939, Congress gave the Treasury more flexibility in how it managed the overall structure of federal debt, giving it an aggregate limit. However, by delegating debt management authority to the Treasury, Congress was able to break the direct connection between authorized spending and the debt that finances it.
While allowing greater flexibility to raise spending, this practice also created a need for Congress to repeatedly raise the debt limit when spending threatens to overrun available credit. Due to occasional political resistance to the idea of continually expanding the federal debt, this process of raising the debt limit has at times engendered controversy, which occurred during the 2011 Debt Ceiling Crisis.
What could happen if Congress does not vote to raise the debt ceiling in 2023?
In a letter to the U.S. House of Representatives, U.S. Treasury Secretary Janet Yellen warned congressional leaders that the U.S. will reach its borrowing limit on Thursday, January 19. Yellen wrote that the Treasury will take "extraordinary measures" to avoid defaulting on its obligations, but she warned these measures might only be sufficient to cover obligations into June. Failure to meet the government's obligations would cause irreparable harm to the U.S. economy, the livelihood of all Americans, and global financial stability, she warned. She also mentioned that the U.S. would risk facing another credit rating downgrade, similar to that of 2011.
Once the debt ceiling is reached, what spending will the Treasury cut?
In a letter to the U.S. House of Representatives, U.S. Treasury Secretary Janet Yellen warned congressional leaders that the Treasury will implement extraordinary measures to prevent the U.S. from defaulting on its obligations.
In January 2023, the Treasury will redeem existing and will suspend new investments of the Civil Service Retirement and Disability Fund and the Postal Service Retiree Health Benefits Fund. It will also suspend reinvestment of the Government Securities Investment Fund of the Federal Employees Retirement System Thrift Savings Plan.
Why did increasing the debt ceiling cause contentious debate in 2011?
Between 2008 and 2010, Congress raised the debt ceiling from $10.6 trillion to $14.3 trillion. In 2011, as the economy showed early signs of recovery and federal debt approached its limit again, negotiations began in Congress to decide spending priorities. Heated debate ensued between pro-debt politicians and fiscal conservatives. Pro-debt politicians argued that failing to raise the limit could result in late, partial, or missed payments to Social Security and Medicare recipients, government employees, and government contractors. Fiscal conservatives argued that any debt limit increase should come with limits on federal spending and debt accumulation.
The Bottom Line
Following the 2007-08 Financial Crisis, in an effort to slow down the severe recession as well as the persistently high unemployment rate, the government increased federal spending. As a result, the federal debt reached its limit on multiple occasions from 2008 to 2011 which led to a series of increases of the debt limit. In 2011, the Treasury asked for its borrowing capacity to be extended.
The 2011 U.S. Debt Ceiling Crisis was a contentious debate in Congress that occurred in July 2011 regarding the maximum amount of debt the federal government should be allowed. Congress resolved the debt ceiling crisis by passing the Budget Control Act of 2011, which became law on August 2, 2011. This act allowed the debt ceiling to be raised by $2.4 trillion in two phases, or installments.