What is the Debt Ceiling?
The debt ceiling, also referred to as the debt limit, is the maximum monetary amount that the federal government can borrow to meet its financial obligations. The limit is set by Congress, and any increases to the amount must be voted on.
The purpose of the debt limit is to exercise control over government spending and borrowing. Established in 1939 under the Public Debts Act, the debt ceiling is intended to ensure that the government does not accumulate excessive debt without appropriate oversight.
When the government reaches its debt ceiling, it is unable to increase outstanding debt and cannot borrow any more money. When this happens, the Treasury Department takes extensive actions to lower the government’s spending. This includes suspending the sale of treasury bonds, for example.
If Congress does not raise or suspend the debt ceiling when the government has reached the limit, the government will not be able to pay its bills on time and will default on its debt. A debt default can have serious consequences, including damaging the government’s creditworthiness, increasing borrowing costs, disrupting financial markets, and undermining confidence in the economy.
What’s Happening Now?
Last January, the U.S. reached its statutory debt limit and has been paying bills by using specific accounting actions known as “extraordinary measures.” Treasury Secretary Janet Yellen has advised Congress to address the debt limit concerns before June 1 to avoid economic downturn. Yellen has stated that if Congress does not act before this date, the government may run out of money.
“With an additional week of information now available, I am writing to note that we estimate that it is highly likely that Treasury will no longer be able to satisfy all of the government’s obligations if Congress has not acted to raise or suspend the debt limit by early June, and potentially as early as June 1.”
Treasury Secretary Janet Yellen
Currently, the debt ceiling is at $31.46 trillion. Since 1960, Congress has raised or extended the debt ceiling 78 times. Since 2013, Congress has decided to temporarily suspend the debt ceiling seven times.
The debt limit debate primarily centers around political talking points rather than fiscal responsibility. The decision to suspend or raise the limit is used by both political parties as a bargaining chip to advance their policy objectives and agendas. Currently, Congress has been unable to reach an agreement on how the government should move forward with the debt ceiling.
Amidst the ongoing political battle over the debt limit, economic experts argue that a debt default could lead to worsening the economic recession we find ourselves in. Moody’s Analytic Report released an estimate in January, stating that a default could lead to economic consequences similar to the Great Recession in 2008.
“A failure of the United States to honor all of its debt would call into question our creditworthiness. Even as we get very close to this date, if Congress doesn’t act, we’re likely to see financial market consequences.”
Treasury Secretary Yellen on ABC’s “This Week”
Fiscal hawks argue that the debt ceiling, while good in principle, does not achieve its goals. If the government can simply raise the debt limit each time they approach it, then it’s not preventing the government from irresponsible overspending. This makes the debt limit a redundant policy that does little to hold the government accountable.
Researched and edited by Hayden Cunningham
