What Is a Debt Ceiling?
The debt ceiling is the maximum amount of money that the United States can borrow cumulatively by issuing bonds. The debt ceiling 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 national 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.
Understanding The Debt Ceiling
Understanding the Debt Ceiling
Before the debt ceiling was created, the President had free reign over 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 has 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.
- 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. Otherwise, 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.
- 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.
- In August 2019, former President Trump signed a bill to suspend the debt ceiling for two years until July 2021.
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, making the United States one of the few exceptions.
Advantages and Disadvantages of the Debt Ceiling
Implementing a debt ceiling is practical, allowing the U.S. Treasury to easily issue debt without having Congress to approve each and every time the federal government needed to issue debt. Since Congress holds the purse strings, this process often became cumbersome. With a debt ceiling, the boundaries are in place for a more efficient monetary approval process.
However, the debt ceiling has notoriously been fluid and raised a few times, raising questions on whether the debt ceiling is effective. The U.S. has reached record-high levels of debt over time.
Holds the nation's finances in check
Debt can be used to fund U.S. government operations.
The debt ceiling improves efficiency in the government's ability to fund obligations including Social Security and Medicare benefits.
The debt ceiling continues to be raised when the limit has been hit.
Risk of default and failure to pay interest to bondholders lowers the U.S.' credit rating and increases its cost of debt
Controversy over whether the debt ceiling is constitutional
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 then-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.
Debt Ceiling During Obama Administration
President Obama faced similar issues during his terms as president. In the 2011 debt ceiling crisis, 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, former 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.
In August 2019, former President Trump signed the Bipartisan Budget Act of 2019 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, increasing spending to $320 billion for the 2020 and 2021 fiscal years.
In April 2021, the U.S. debt topped $28 trillion for the first time.
Debt Ceiling FAQs
What is the current debt ceiling?
The current debt ceiling was suspended by former President Trump until July 2021.
How many times has the debt ceiling been raised?
According to the U.S. Department of the Treasury, the debt ceiling has been raised, extended, or revised 78 separate times since 1960. This occurred 49 times under Republican presidents and 29 times under Democratic presidents.
Who controls the debt ceiling?
The debt ceiling is approved by Congress.
What happens if the debt gets too high?
Hitting the debt limit and failing to pay interest payments to bondholders would have grave economic consequences. The United States government would be in default, lowering its credit rating and increasing the cost of its debt. This would throw the U.S. economy into a tailspin.
Is there a limit to the national debt?
The debt ceiling is the limit set on the amount of debt the U.S. government is allowed to incur. As of April 8, 2021, the U.S. national debt was $28.1 trillion and rising.
The Bottom Line
The debt ceiling was created during World War I in order to regular U.S. government spending and to keep the U.S. Treasury and president fiscally responsible. Since then, the debt ceiling has been raised or revised 78 times in order to avoid the possibility of default and keep the U.S. economy running, with no signs of Congress turning to other options, despite questions over the debt ceiling's effectiveness.