What Is the Debt Ceiling, and What Happens If Congress Doesn’t Raise It?

(Bloomberg) -- The very phrase “debt ceiling” sounds austere and restrictive, as if it’s a lid on government spending. In fact, the U.S. federal debt limit was first conceived more than a century ago to make it easier, not harder, for the government to borrow money. But it morphed into an explosive political tool with the potential to roil financial markets, since a failure to raise the debt ceiling could eventually result in a first-ever default on some of the government’s obligations.

1. Why is there a debt ceiling?

Its creation, in 1917, was supposed to make it easier to finance World War I by grouping bonds into different categories, easing the burden on Congress to approve each bond separately. With World War II looming in 1939, Congress created the first aggregate debt limit and gave the Treasury Department wide latitude on what bonds to issue.

2. When did it become a political issue?

The limit was routinely raised without incident until 1953. That year, approval was held up in the Senate in an attempt to restrain President Dwight Eisenhower, who had requested an increase to enable construction of the national highway system. The limit has since been raised dozens of times, usually without a fight. But the past quarter century has seen the debt ceiling increasingly become a partisan weapon.

3. What were the biggest fights?

Raising the debt ceiling was among the budget-related disputes that resulted in two shutdowns of the federal government in late 1995 and early 1996. Another debt ceiling crisis occurred in 2011, rattling financial markets and prompting Standard & Poor’s to issue the first-ever downgrade of the U.S. government’s credit rating. A second debt-ceiling faceoff between then-President Barack Obama and congressional Republicans occurred in 2013 as part of a doomed Republican effort to undo the Affordable Care Act. It resulted in the cap being suspended for the first time.

4. What’s the issue now?

Treasury Secretary Janet Yellen has urged Congress to increase the debt limit as soon as possible, warning that her department otherwise will effectively run out of cash around Oct. 18. For now, she continues to employ a toolbox of special measures, such as withholding regularly scheduled contributions to a federal employee retirement fund and using that money to keep paying debts. Once those are exhausted, the options get more dire, potentially leading to a partial government shutdown or delays in some government payments.  

5. What’s the current debt ceiling?

After being suspended by Congress since August 2019, the debt ceiling was reset on Aug. 1 at the current level of debt: $28.4 trillion.

6. Who wants to raise it?

Democrats do. They are in power in the White House and in both chambers of the U.S. Congress. But they want Republicans to agree to raise it too, noting that they went along with debt limit hikes under Republican President Donald Trump without a fuss (despite opposing his tax cuts). Senate Republican Leader Mitch McConnell says Democrats should raise the debt limit on their own, given that they want to spend up to $3.5 trillion on President Joe Biden’s economic agenda; Democrats say raising the ceiling is needed merely to accommodate spending under Trump. While Democrats have the power to raise the debt limit by simple majority votes on a so-called budget reconciliation bill, so far they have chosen not to go that route. As a result, it would take a supermajority of 60 votes to overcome a filibuster in the Senate, requiring the acquiescence of at least 10 Republicans. 

7. Does the debt ceiling restrain government spending?

Not increasing it could theoretically restrain government spending, but in a chaotic and unpredictable way. That’s because raising the ceiling simply lets the government pay for things it has already decided to buy under spending and tax laws set by Congress. Some budget experts and commentators want to abolish the ceiling, arguing that the congressional battles cost taxpayers money by increasing economic uncertainty, among other problems. Supporters of the limit say using it to bargain for spending cuts serves the public interest at a time of historically high debt levels. The Obama administration considered but rejected untested ways to circumvent the debt limit, including minting platinum coins and placing them in the Federal Reserve or declaring the debt limit a violation of the 14th Amendment prohibition on questioning federal debt.

The Reference Shelf

• A U.S. debt clock displays an up-to-the-second ticker on the national debt and many other fast-moving statistics.
• The Congressional Research Service examines the debt ceiling since 2011.
• The Committee for a Responsible Federal Budget aggregates news, documents and other resources on the debt ceiling.
• The Bipartisan Policy Center’s analysis of the debt limit and “extraordinary measures.”

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