What is 'Statutory Debt Limit'

The statutory debt limit often referred to as the debt ceiling, is the limit to the amount of debt that the U.S. government can take on to meet its legal obligations. These obligations include things like paying for Social Security, military salaries, Medicare and tax refunds. It also includes interest payments on existing debt. Once the government reaches the statutory debt limit, it cannot take on new obligations.

BREAKING DOWN 'Statutory Debt Limit'

Only the U.S. Congress has the authority to raise the statutory debt limit. Raising the statutory debt limit has occurred 78 times since 1960. Raising the threshold has taken several different forms, such as redefining the debt limit, allowing a temporary extension to the ceiling and permanently raising the limit. The debt limit has been raised 49 times under Republican presidents and 29 times under Democratic presidents.

Though some politicians known as deficit hawks, along with many citizens, disapprove of raising the debt limit, Congress has historically recognized the necessity of raising the ceiling to avoid defaulting on required government payments. In most cases, refusing to raise the debt limit would be catastrophic for the U.S. economy.

Those living on Social Security would not receive their monthly payments. Members of the military would go unpaid, and the U.S. Government would default on many of its debt obligations. Large segments of the U.S. economy would experience great upheaval, and an unprecedented national economic crisis would ensue.  Due to this crisis state, many lawmakers still vote for raising the debt limit when the U.S. faces the potential of defaulting on payments.

The Rising Debt Limit

The first statutory debt limit set in the U.S. was at $45 billion in 1939. However, Congress raised the ceiling annually during the duration of World War II. By 1946, the limit had reached $300 billion. After the war, Congress eventually lowered the debt limit to its amount pre-World War II. However, over the following decades, it continued to rise, reaching $20.5 trillion in December of 2017.

When Congress opts to raise the debt limit, the Congressional Budget Office (CBO) calculates an “X-date.” X-date refers to the day that the government will likely exhaust its debt extension and need to extend the limit further, assuming that it has not increased its income and paid off debts. 

The government gets income through taxes, so raising taxes would be one way to improve revenue to pay off debts. Alternatively, the government may choose to cut spending—restricting the funds it spends on infrastructure, the military, etc. The money saved through these cuts can also help prevent raising the debt ceiling. While raising the debt ceiling when necessary tends to be a bipartisan action, theories on ways to avoid it tend to fall more starkly along partisan lines.

RELATED TERMS
  1. Ceiling

    A ceiling is a maximum permissible level in a financial transaction. ...
  2. Net Debt

    Net debt is a metric that shows a company's overall debt situation ...
  3. Funded Debt

    A funded debt is a company's debt that will mature in more than ...
  4. Budget Control Act - BCA

    Budget Control Act is a 2011 federal statute to increase the ...
  5. Debt Financing

    Debt financing occurs when a firm raises money for working capital ...
  6. Sovereign Debt

    Sovereign debt is issued by the national government in a foreign ...
Related Articles
  1. Personal Finance

    Should Congress Raise The Debt Ceiling?

    Some members of Congress say the debt ceiling must be raised while others insist it's time Uncle Sam learned how to get by without any more borrowing. We'll look at the issues at stake.
  2. Insights

    Treasury's Mnuchin to Congress: Raise Debt Ceiling

    As the debt ceiling looms, Treasury Secretary Mnuchin calls on Congress to act fast.
  3. Insights

    How Debt Limits A Country's Options

    While debt is fundamentally necessary to the operation of a national government, it can also be limiting and dangerous.
  4. Taxes

    National Debt: Who Pays?

    There's a huge national debt being left behind for future generations, but what have past administrations done to lessen the blow?
  5. Personal Finance

    Best 5 Money-Saving Tips to Get out of Debt

    Understand the different types of debt and the reasons why people get into debt. Learn about five tips to follow to get out of debt.
  6. Retirement

    Why Retirees Are Carrying More Debt Than Ever

    As people reach retirement they are carrying more debt than ever before. Why and what to watch for.
  7. Investing

    Target Corp: WACC Analysis (TGT)

    Learn about the importance of capital structure when making investment decisions, and how Target's capital structure compares against the rest of the industry.
  8. Personal Finance

    Understanding How To Invest While in Debt

    Find out how to invest while in debt even If you are borrowing. You can still learn to balance your debt while saving and investing for a better tomorrow.
RELATED FAQS
  1. Why would a company use a form of long-term debt to capitalize operations versus ...

    Learn about the different consequences of using long-term debt versus equity to raise capital for business activity, and ... Read Answer >>
  2. Do I still owe debt collectors for a debt that's past the statute of limitations ...

    Learn more about the statutes of limitations that govern certain personal debts and why you maintain obligations as a debtor ... Read Answer >>
  3. What are the different ways corporations can raise capital?

    Find out about raising capital for corporations with debt and equity capital. Learn how interest and dividend payments factor ... Read Answer >>
Trading Center