Debt Ceiling

What Is the 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 by the U.S. government on its debt.

Understanding the Debt Ceiling

Before the debt ceiling was created, Congress had free reign over the country's finances. In 1917, the debt ceiling was created during World War I to make the federal government 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.

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 bonds without having Congress approve it each and every time the federal government needs to raise money—a pretty cumbersome process. 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 it's effective as a tool to ensure fiscal responsibility. The U.S. has reached record-high levels of debt over time.

Debt Ceiling Showdowns and Shutdowns

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 members of Congress—their views 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 to make the cuts, which led to the government shutting down. The White House and Congress eventually agreed on a balanced budget with modest spending cuts and tax increases.

Debt Ceiling During the Obama and Trump Administrations

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 September 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 13 months as part of a bill enacted in February 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. The debt ceiling was once again raised to $31.4 trillion in December of 2021.

The Bottom Line

The debt ceiling was created during World War I in order to regulate U.S. government spending and to keep the U.S. government 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.