When the ceiling is reached, the U.S. Treasury Department cannot issue any more Treasury bills, bonds, or notes. It can only pay bills as it receives tax revenues. If the revenue isn’t enough, the Treasury Secretary then must choose between paying federal employee salaries, Social Security benefits, or the interest on the national debt. Congress already knows how much it will add to the debt when it approves each year’s budget deficit. When it refuses to increase the debt limit, it’s saying it wants to spend but not pay its bills. That’s like your credit card company allowing you to spend above its limit and then refusing to pay the stores for your purchases. Congress imposes the debt ceiling on the statutory debt limit, which is the outstanding debt in U.S. Treasury notes after adjustments. The adjustments include unamortized discounts, old debt, and guaranteed debt. It also includes debt held by the Federal Financing Bank. The statutory debt limit is a little less than the total outstanding U.S. debt recorded by the national debt clock. It’s also important to note that there are two types of U.S. debt. The first is what the government owes to itself, most of which includes the Social Security Trust Fund and federal employee retirement funds—this is known as intragovernmental debt. The debt that’s owed to everyone else is the public debt, which covers the majority of all debts in the U.S.
History of the National Debt Ceiling
Congress created the debt ceiling in the Second Liberty Bond Act of 1917. Initially, it allowed the Treasury Department to issue Liberty bonds so the U.S. could finance its World War I military expenses. Generally, elected officials have a lot of pressure to increase the annual U.S. budget deficit, yet increases in the budget push the national debt higher and higher. There is not much incentive for politicians to curb government spending. They generally may get reelected for creating programs that benefit their constituency and their donors. They also may be more likely to stay in office if they cut taxes. Deficit spending does, in general, create economic growth.
Why the Debt Ceiling Matters
Congress must raise the debt ceiling so the U.S. doesn’t default on its debt, and this happens often. Between 1960 and September 2021, Congress acted 78 separate times to permanently raise, temporarily extend, or revise the debt limit, according to the U.S. Department of the Treasury. If you look at the debt ceiling history, you’ll see that all parties and all members of Congress generally know when it is necessary. The debt ceiling really only has a strong impact when the president and Congress can’t agree on fiscal policy, which has occurred in the past. The non-majority in Congress has historically used it as a way to get attention, as they might have felt slighted by the budget process. A debt ceiling crisis could come from this.
Past Debt Ceiling Crises
On July 31, 2021, the debt ceiling suspension that was put in place by the Bipartisan Budget Act of 2019 expired. This meant that the debt ceiling was reached once again. The national debt on Aug. 2, 2021, was $28.4 trillion. In October, Treasury Secretary Janet Yellen released a statement urging Congress to raise or suspend the debt ceiling as a way to prevent default. Just days later, Senate Democratic Majority Leader Chuck Schumer said that an agreement had been reached to extend the debt ceiling in early December 2021. While not a complete debt ceiling crisis, the national debt had reached new highs in 2021, drawing attention and concern from many. On Dec. 14, 2021, the debt ceiling was raised by $2.5 trillion, with a new limit of around $31.4 trillion. This increase constituted the largest dollar amount increase of the national debt. While the debt ceiling is raised pretty frequently, the process of raising it can often lead to disagreement among party leaders, and a possible government shutdown. This happened in 2013 and again in 2018. In January 2013, Congress threatened not to raise the debt ceiling. It wanted the federal government to cut spending in the fiscal year 2013 budget. However, better-than-expected revenues meant the debt ceiling debate was postponed until that fall. On Sept. 25, 2013, the Treasury Secretary warned that the nation would reach the debt ceiling on Oct. 17. Many Republicans said they would only raise the ceiling if funding for Obamacare was taken out of the fiscal year 2014 budget. Then, on the first day of fiscal year 2014—Oct. 1, 2013—the government shut down because Congress hadn’t approved the funding bill. The Senate wouldn’t approve a bill that defunded Obamacare, and the House wouldn’t approve a bill that funded it. On Oct. 17, 2013, Congress agreed to a deal that would let the Treasury issue debt until Feb. 7, 2014. Government leaders are often met with the choice to raise the debt ceiling, and the effects differ depending on how quickly they come to a decision. For example, the government shutdown in 2018-2019 was the longest ever, lasting 35 days, and furloughed about 380,000 federal employees, with another 420,000 reporting to work without pay. It was estimated to have reduced the gross domestic product (GDP) by about $11 billion.
What Happens When the Debt Ceiling Isn’t Raised?
As the debt approaches the ceiling, the Treasury can stop issuing notes and borrow from its retirement funds. Once the debt ceiling is reached, Treasury cannot auction new notes. Instead, it must rely on incoming revenue to pay ongoing federal government expenses. That happened in 1996 when the Treasury announced it could not send out Social Security checks before Congress eventually intervened. Competing federal regulations make it unclear how Treasury should decide which bills to pay and which to delay. If the Treasury did default on its interest payments, a few things would happen first:
The federal government could no longer make its monthly payments.Federal employees would be furloughed and pension payments wouldn’t go out. All those receiving Social Security, Medicare, and Medicaid payments might not receive their funds.Federal buildings and services would close.
Second, the yields of Treasury notes sold on the secondary market would rise, which would inevitably create higher interest rates. This would increase the cost of doing business and buying a home. It would also slow down economic growth. Third, owners of U.S. Treasurys would likely dump their holdings, causing the dollar to plummet. The dollar’s drastic decline could eliminate its status as the world’s reserve currency. Over time, the standard of living in the U.S. would decline. In this situation, the nation would find itself unable to repay its debt.
What Happens When the Debt Ceiling Is Raised?
Continuing to raise the debt ceiling puts the U.S. further into debt. Over the years, the debt ceiling has become more like a speed limit sign that is never enforced. In the short term, there are positive consequences to raising the debt ceiling. It allows the U.S. to pay its bills, and consequently, it helps the nation avoid a total debt default. The long-term consequences, however, are severe. The paper-thin debt ceiling is apparently the only restraint on out-of-control government spending. A 2017 survey found that 57% of people in the U.S. said Congress should not raise the debt ceiling. Only 20% said it should be raised. Generally, the debt ceiling is good in that it creates a crisis that focuses national attention on the debt. Raising it is a necessary consequence of management by crisis. The debt ceiling and government spending can also become a concern if the debt-to-gross domestic product (GDP) ratio gets too high. According to the International Monetary Fund (IMF), some scholars feel that the tipping point for the debt-to-GDP ratio is around 77% for developed countries. When the debt-to-GDP ratio gets too high, debt owners become concerned that a country can’t generate enough revenue to pay the debt back.
