What Is a Debt Ceiling?

The debt ceiling is the the maximum amount of money that the United States can borrow by issuing bonds. It was created under the Second Liberty Bond Act of 1917 and is also known as the "debt limit" or "statutory debt limit." If U.S. government debt levels bump up against the ceiling, the Treasury Department must resort to other "extraordinary" measures to pay government obligations and expenditures until the ceiling is raised again. The debt ceiling has been raised or suspended numerous times over the years to avoid the worst-case scenario, which would be a default on U.S. government debt. 

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Understanding The Debt Ceiling

Understanding the 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 had approached the limit. By hitting the limit and failing to pay interest payments to bondholders, the United States would be in default, lowering its credit rating and increasing the cost of its debt.

Key Takeaways

  • The debt ceiling is the maximum amount that the U.S. government can borrow by issuing bonds.
  • When the debt ceiling is reached, the Treasury Department must find other ways to pay expenses or there is a risk the U.S. will default on its debt.
  • The debt ceiling has been raised or suspended several times to avoid the risk of default.
  • In Aug. 2019, President Trump signed a bill to suspend the debt ceiling for two years, when U.S. debt is projected to be $25 trillion.

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 few exceptions.

Debt Ceiling Timeline

There have been a number of showdowns over the debt ceiling, some of which have led to government shutdowns. The conflict is usually between the White House and Congress, and the debt ceiling is used as leverage to push budgetary agendas.

For example, in 1995, the Republican congress—vocalized by the House Speaker Newt Gingrich—used the threat of refusing to allow an increase in the debt ceiling to negotiate increased government spending cuts. President Clinton refused, which led to a government shut 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 as president. In 2011, Republicans in Congress demanded deficit reductions 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 was 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, which was when the Treasury was estimated to run out of money. 

The debt ceiling was raised again in 2014, 2015, and early-2017. In Sept. 2017, with U.S. debt exceeding $20 trillion for the first time, President Trump signed a bill extending the debt ceiling to Dec. 8, 2017. The ceiling was later suspended for thirteen months as part of a bill enacted in Feb. 2018. The ceiling came into effect—and was increased—again in March 2019 when U.S. government debt topped $22 trillion.

Lastly, in Aug. 2019, Trump signed a bill that suspended the debt ceiling through July 31, 2021. The legislation also lifted spending caps on federal agency budgets, while ensuring that the government could pay its bills in the short term. Suspending the ceiling in this manner eliminated the risk of default for another two years, when debt is projected to reach $25 trillion.