Debt Ceiling Definition, Why Its Raised, Past Crises

What It Is, and Why Not Raising It Creates a Crisis

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Definition: The debt ceiling is a limit imposed by Congress on how much debt the Federal government can carry at any given time. It’s similar to the limit on your credit card, with one major difference. Congress is also in charge of how much is added to debt with each year’s budget deficit. In other words, it’s setting a limit on itself. It usually spends enough to go above the debt ceiling it also sets. That’s like your credit card company allowing you to spend above its limit, but just not paying the bills.

Congress must raise the debt ceiling so the U.S. doesn’t default on its debt. This usually isn’t a problem. In fact, during the last ten years, Congress increased the debt ceiling ten times — four times in 2008 and 2009 alone. If you look at the debt ceiling history. you’ll see that Congress usually thinks nothing of raising the debt ceiling.

Technically, the debt ceiling is only imposed on the Statutory Debt Limit , which is the outstanding debt in U.S. Treasury notes adjusted for unamortized discounts, very old debt, debt held by the Federal Financing Bank and guaranteed debt. This amount is just a little less than the total outstanding debt recorded by the national debt clock .

It also includes a lot of debt the government owes to itself, primarily the Social Security Trust Fund. The debt that’s owed to everyone else is the public debt. It’s only about 70% of the total debt. For more, see Who Owns the U.S. Debt?

Debt Ceiling History

Congress created the debt ceiling in the Second Liberty Bond Act of 1917. It allowed the Treasury Department to issue Liberty Bonds so the U.S. could finance its World War I military expenses These longer-term bonds had lower interest payments than the short-term bills Treasury used before the Act. Congress now had the ability to control overall government spending for the first time. Prior to that, it had only issued authorization for specific debt, such as the Panama Canal or other short-term notes. (Source: CRS Report for Congress, The Debt Limit: History and Recent Increases. 2008)

However, this is no longer necessary. In 1974, Congress created the budget process that allows it to control spending. That’s why the debt ceiling is usually raised. When the budget process works smoothly, both houses of Congress and the President have already agreed on how much will be spent. There’s really no need for a debt ceiling because it simply allows the government to borrow money to pay for the bills it has already approved. (Source: University of California Berkeley, 1974 Budget Control Act )

Elected officials have a lot of pressure to increase the annual U.S. budget deficit ;pushing the national debt higher and higher. That’s because there is very little natural incentive for politicians to curb government spending. They get re-elected for creating programs that benefit their constituency and their donors. They also stay in office if they cut taxes. Deficit spending does, in general, create economic growth. For more, see Why Is the U.S. Debt So High?

When the Debt Ceiling Matters

The debt ceiling only matters when the President and Congress can’t agree on fiscal policy. This occurred in 1985, 1995-1996, 2002, 2003, 2011 and most recently in 2013. It’s kind of a last resort to get attention by the non-majority party in Congress. They might have felt slighted by the budget process.

The debt ceiling, and government spending, can also become a concern if the debt to GDP ratio gets too high. According to the International Monetary Fund, that level is 77% for developed countries. Then debt owners become concerned that a country can’t generate enough revenue to pay the debt back.

What Happens If the Debt Ceiling Isn’t Raised?

As the debt approaches the ceiling, Treasury can stop issuing Treasury notes, and borrow from some retirement funds (but not Social Security or Medicare). Normally, it can withdraw around $800 billion it keeps at the Federal Reserve bank. Between 2008-2010, the Fed vastly increased the amount of Treasury notes it held, a policy known as Quantitative Easing. Former Congressman Ron Paul (R-Texas), Chair of the Fed Oversight Committee, suggested that the Fed forgive or postpone payment of the $1.6 trillion in debt it owned. This would have postponed the need to raise the debt ceiling.

Once the debt ceiling is reached, Treasury cannot auction new Treasury notes. It must rely on incoming revenue to pay ongoing Federal government expenses. This happened in 1996, and Treasury announced it could not send out Social Security checks.

Competing Federal regulations make it unclear how Treasury could decide which bills to pay, and which to delay. Foreign owners would get concerned that they may not get paid. See What Is the U.S. Debt to China?

If Treasury did actually default on its interest payments, three things would happen. First, the federal government could no longer make its monthly payments. This means employees would be furloughed, and pensions payments wouldn’t go out. All those receiving Social Security, Medicare, and Medicaid payments would go without. Federal buildings, and services, would close.

Second, the yields of Treasury notes sold on the secondary market would rise. This would create higher interest rates. increasing the cost of doing business and buying a home. This would slow economic growth.

Third, owners of U.S. Treasuries would dump their holdings. This would cause the dollar to plummet, probably removing its status as the world’s reserve currency. The standard of living in America would decline. This would make it highly unlikely that the U.S. could ever repay its debt. For all these reasons, Congress shouldn’t monkey around with raising the debt ceiling. If members are concerned with government spending, they should get serious about adopting a more conservative fiscal policy long before the debt ceiling needs to be raised.

The 2013 Debt Ceiling Crisis

On February 11, 2014, House Speaker John Boehner passed a bill to suspend the debt ceiling until March 15, 2015, The bill approved without any attachments, riders or insistence that Obamacare be defunded. He didn’t have 218 Republican votes to do so. Instead, he passed it with 193 Democrats and 28 Republicans.

H e was severely criticized by tea party Republicans in the House, who called it a . complete capitulation on the Speaker’s part and demonstrates that he has lost the ability to lead the House of Representatives. They, and Senator Ted Cruz, were the only ones who thought the threat of a debt default was a good tool to force the government to cut spending. However, there aren’t enough of them to wield this ax. For more, see Fox News, Boehner Says House to Pass Clean Debt Limit Hike .

On October 17, 2013, Congress agreed to a deal that would let Treasury issue debt until February 7, 2014. If it had’t, then the Treasury could not auction any new notes to pay bills. At that point, Treasury estimated it had $30 billion in cash. Here’s the schedule of bills that were coming due:

  • Oct. 23: About $12 billion in Social Security benefits.
  • Oct. 31: A $6 billion interest payment, $3 billion in Federal employee wages and $2 billion to Medicare providers.
  • Nov. 1: A whopping $58 billion would come due for Social Security and disability benefits, Medicare, and military pay. There would not have been enough incoming revenue between October 17 and November 1 to make that big of a payment.
  • November 14: Social Security benefits of $12 billion were due.
  • November 15: A $29 billion interest payment on outstanding Treasuries would not have been paid. The U.S. would have defaulted on its debt for the first time in its history.

Treasury Secretary Jack Lew first warned o n September 25 2013, that the debt ceiling would be reached on October 17. Many Republicans said they would only raise the ceiling if funding for Obamacare were taken out of the FY 2014 budget. At first, it looked like House Speaker John Boehner would pass a debt ceiling override without them. He doesn’t want Republicans to be blamed for another fiasco like the 2011 debt ceiling crisis.

However, on September 20 Boehner changed his mind. He promised to defund Obamacare, by any means necessary — whether it meant the budget or the debt ceiling would be held hostage. Another crisis was underway.

On October 1, 2013, Congress allowed the government to shut down because no funding bill had been approved. The Senate wouldn’t approve a bill that defunded or delayed Obamacare. The House wouldn’t approve a bill that funded it. Boehner announced he wouldn’t raise the debt ceiling unless Democrats agreed to negotiate cuts in mandatory programs. such as Medicare, Medicaid and Obamacare. President Obama wouldn’t negotiate a budget until the House approved a funding bill and raised the debt ceiling. At the last minute, the Senate and House agreed upon a deal to reopen the government and raise the debt ceiling. For more, see Government Shutdown .

Earlier that year, in January, Congress used the threat not raising the debt ceiling to force the Federal government to cut spending in the FY 2013 budget. Its position was that one dollar of spending should be cut for every dollar the debt ceiling was raised. President Obama replied he would not negotiate, since the debt was incurred to pay bills that Congress already approved. Fortunately, better-than-expected revenues meant the debt ceiling debate was postponed until the fall. (Source: Atlanta Blackstar, Debt Ceiling Postponed. January 23, 2013)

2011 Debt Ceiling Crisis

In 2011, Congress learned that threatening to NOT raise the debt ceiling was a poor way to manage the budget. The uncertainty surrounding this crisis was one reason the bond rating agency Standard & Poor’s lowered the U.S. credit from AAA to AA+ in August 2011. This caused the stock market to plummet.

As a result, Congress raised the debt ceiling in early August by passing the Budget Control Act. This allowed the debt ceiling to be raised to $16.694 trillion. The Act also required a Congressional Committee to suggest ways to reduce spending. The Simpson-Bowles Report developed a lot of good suggestions to reduce the debt, but neither Congress nor the President adopted it. Instead, a set of mandatory tax increases and spending cuts, known as the fiscal cliff. were enacted to take place on January 1, 2013.

Congress avoided the fiscal cliff by passing the American Taxpayer Relief Act. It reinstated the 2% payroll tax, and postponed the budget cuts, known as sequestration. until March 1 2013 to allow time for a budget to be negotiated. However, Congress couldn’t agree on budget cuts by the new deadline, allowing sequestration to kick in. For more, see Fiscal Cliff 2013. Article updated September 24, 2014.

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