Debt Ceiling: Overview

Introduction

The debt ceiling is the legal limit on the amount of debt that the US government is authorized to carry in order to meet its existing financial obligations, including entitlements, interest on the national debt, tax refunds, and military salaries. The debt limit is set by Congress. Rather than have Congress approve borrowed funds each time they are needed, the debt ceiling avoids the need for specific Congressional approval for most types of borrowing, as long as the total does not exceed the ceiling. The concept was established in US federal law in 1917 and remained in place into the twenty-first century.

If US debt were to exceed the established ceiling, it could lead to an unprecedented situation in which the US government is forced to default on its legal obligations. Were the US government to default, it would be unable to pay its obligations, causing significant hardship for many Americans; default would also damage the credibility of the United States in the global financial system, leading to higher borrowing costs and interest rates and likely triggering a widespread financial crisis. Historically, there has been bipartisan motivation in Congress to avoid such a situation by simply raising the debt ceiling as necessary. Nevertheless, there has also often been sharp criticism of such raises or of the existence of debt ceiling itself, often rooted in fundamental partisan political disagreement over government spending.

Debate over the issue became particularly heated in 2011, when the Republican majority in the US House of Representatives refused to raise the debt ceiling without significant concessions from the Democratic administration of President Barack Obama, bringing the government within days of defaulting. Although that crisis was ultimately resolved with another increase in the ceiling level, the deepening animosity between Democrats and Republicans set a precedent that future debt ceiling approvals could no longer be assumed. Following another debt ceiling fight in 2013, Congress adopted the habit of simply suspending the debt limit for periods of time, allowing the government to spend as much as needed, and then setting a new debt ceiling to the level of what had been spent during the suspension. This led to ongoing debate about whether the debt ceiling was still a useful tool of fiscal control. Further incidents in which the US government came close to default, including in 2021 and 2023, raised further questions about the best way to avoid similar crises in the future.

Understanding the Discussion

Debt ceiling: The legal limit placed on borrowing by the federal government, which must be approved by Congress.

Default: A failure to repay borrowed funds according to the terms or schedule agreed upon by the lender.

Deficit: The negative balance in a budget created when spending exceeds revenue.

Gross domestic product (GDP): A measure of the overall value of a country’s economic output.

National debt: The amount of money owed by the US government to its creditors.

History

The debt ceiling was created by Congress with the passage of the Second Liberty Bond Act of 1917. Before the debt ceiling was established, the US government needed to secure approval from Congress every time it wanted to borrow money from the public through the issuance of bonds. It was, therefore, up to Congress to establish and approve the particulars of all borrowed funds, including the associated interest rates. To effectively fund US military and government operations during World War I, however, Congress gave the US Treasury blanket approval to issue government bonds as long as the amount did not exceed the established debt ceiling. The Second Liberty Bond Act of 1917 dropped certain limitations placed on the Treasury Department for issuing debt, but the act retained separate limits for previous debt obligations accrued by the government.

To give the government more flexibility in managing federal financial obligations, in 1939, President Franklin D. Roosevelt asked Congress to eliminate the separate limits on various forms of debt. Congress enacted the measure in June 1939 and created the first general limit, which covered most national debts. At this time, the debt ceiling was set at $45 billion. In 1940, another separate limit was established—$4 billion for national defense purposes—but in 1941, this separate limit was reincorporated into the general debt limit and the ceiling was increased to $65 billion.

Between World War I and World War II, the total federal debt crept closer to the debt ceiling. From 1941 and 1945, the debt ceiling had to be raised each year to pay for the costs incurred by World War II. By 1945, the debt ceiling limit was set at $300 billion. It was subsequently reduced in 1946 to $275 billion, where the limit remained until 1954. Between 1954 and 1962, the debt limit was reduced twice and raised seven times, bringing the limit again to $300 billion in 1962.

In 1965, President Lyndon B. Johnson signed the Social Security Act, creating two federal health programs—Medicare for the elderly and Medicaid for low-income Americans. These two programs, along with Social Security benefits, would eventually become major factors in the country’s growing debt. Congress did not foresee or account for the effects of the country’s demographic changes, nor did it anticipate the baby boomer generation or the spike in medical costs that occurred in the following decades. Nevertheless, through the late 1970s, the national debt’s growth continued to slow, more or less matching the rate of inflation. In 1981, the debt ceiling surpassed $1 trillion, when President Ronald Reagan signed legislation to raise the debt limit in order to fund tax cuts and increases in military spending. Under President Reagan, the debt ceiling was raised eighteen times, reaching $2.8 trillion in 1987.

The national debt continued to climb though the 1990s. The debt ceiling was raised four times under President George H. W. Bush and an additional four more times under President Bill Clinton, who left office in 2001 with the debt ceiling level at nearly $6 trillion. During this period, the issue began to attract substantial partisan political debate. Notably, in 1995, the Republican majority in Congress threatened to refuse to increase the ceiling unless President Clinton, a Democrat, agreed to their proposed federal budget cuts. This standoff contributed to two government shutdowns lasting into 1996, but ultimately the ceiling was raised before the government defaulted.

Throughout the 2000s, the US national debt soared, primarily due to the tax cuts implemented under Republican President George W. Bush, the costly wars in Afghanistan and Iraq, and slower-than-expected economic growth (which decreased tax revenues). By the time President Bush left office in 2009, the debt ceiling’s level had nearly doubled to $11.3 trillion. The trend continued under the Democratic administration of President Barack Obama, with Congress approving raises to $12.1 trillion in February 2009 and to nearly $14.3 trillion in February 2010. However, the Obama administration faced intense conservative opposition to virtually every policy, and with Republicans taking control of the House of Representatives in 2011, the stage was set for another partisan showdown over the debt ceiling.

Congress finalized the passage of the 2011 federal budget in April 2011. Weeks later, the debt ceiling that had been approved in February 2010 was reached. Roughly 40 percent of all government spending that had been approved in the 2011 budget was to be funded with borrowed money. To avoid an immediate default, the US Treasury enacted so-called extraordinary measures, including the suspension of all government debt issuance. Most economists agreed that this would prevent the borrowing authority of the United States from being exhausted until early August, giving Congress time to raise the debt ceiling. However, many House Republicans (particularly those aligned with the Tea Party movement) refused to vote for such a raise without a strict deficit-reduction plan. This hard-line tactic was controversial, as many commentators noted that government default would directly harm many Americans, including by suspending the payments of military salaries and Social Security benefits, as well as the credit rating of the United States, likely triggering a global financial crisis.

After much tense negotiation, Democratic and Republican leaders announced a compromise known as the Budget Control Act of 2011, which included both budget cuts and an increase in the debt ceiling. On August 1, 2012, the House passed the bill by a vote of 269 to 161. The bill passed the Senate on the following day by a vote of 74 to 26, and it was immediately signed into law by President Obama, thereby temporarily staving off the potential crisis of US government default. Nevertheless, the 2011 debt ceiling crisis prompted the credit-rating agency Standard & Poor’s to downgrade the credit rating of the United States from its highest rating, AAA, to AA+, an unprecedented event in the history of the United States.

The debt ceiling continued to be a contentious issue over the following years, tied closely to partisan disagreement over government spending in general. On December 31, 2012, the United States reached the legal borrowing limit of approximately $16.4 trillion. The US Treasury again announced a “debt issuance suspension period” in which “extraordinary measures” would be enacted to allow the government to dontinue to meet its obligations. In response to the situation, Congress drew up a debt ceiling suspension plan that would temporarily suspend the statutory debt limit until May 19, 2013.

By the time the suspension was lifted in May, the United States had added $300 billion in debt, making the new debt ceiling roughly $16.7 trillion. The Treasury reinstituted extraordinary measures to stave off default, including fundraising techniques such as tapping exchange rate funds, that were scheduled to last through October 17, 2013. Health care-related legislation passed by the House in September 2013 was amended by the Senate on October 16, 2013, to once more suspend the debt ceiling, this time through February 7, 2014. Following the same formula as before in which the debt limit was raised by the amount borrowed during the suspension, the debt ceiling jumped to approximately $17.2 trillion by the time the October 2013 suspension was lifted in February 2014.

Suspending the debt ceiling subsequently became something of a new normal for Congress. The ceiling was suspended again in 2014 to 2015, and in October 2015 it was suspended through March 2017. These suspensions were instituted without the kind of big political fights that happened in 2011 and 2013. However, they still generated controversy from some observers, with critics increasingly questioning the viability of the debt ceiling in general if it could so frequently be essentially ignored. Meanwhile, Republican Donald Trump assumed the presidency in 2017 and soon pushed through a huge tax cut that increased budget deficits still further, raising the national debt beyond $20 trillion by 2018.

Congress passed the Bipartisan Budget Act of 2019 in August of that year. The act suspended the debt limit through July 31, 2021.

Debt Ceiling Today

Debate over the debt ceiling continued into the 2020s. Many fiscal conservatives, including some prominent Congressional Republicans, continued to insist that repeated increases in the country’s legal borrowing limit are irresponsible without also effecting larger spending cuts. On the other hand, some Democrats and others argued for the elimination of the debt ceiling altogether, claiming that it is an outdated and ineffective way of controlling the national debt. Some legal scholars have suggested that the debt ceiling could be challenged as unconstitutional under the Fourteenth Amendment, which states,

Partisan conflict over the debt ceiling intensified after the suspension of the limit under Bipartisan Budget Act of 2019 expired in July 2021. The Treasury again enacted so-called extraordinary measures to meet the nation's financial obligations as Congressional Republicans sparred with the administration of Democratic president Joe Biden on budget issues. (While Democrats narrowly controlled both chambers of Congress at the time, they lacked the votes to pass a long-term debt ceiling increase unilaterally.) In October Congress approved a temporary raise that pushed the projected default deadline out to December, but disagreement continued. Republican leaders suggested that Democrats could use the budget reconciliation process if they wanted to raise the ceiling on their own terms, but Democrats countered that this would take too long to avoid default. As a compromise, in early December the House passed a bill allowing the Senate to approve a one-time, fast-tracked increase in the debt ceiling by simple majority (rather than the typically needed two-thirds majority). President Biden signed the increase into law just hours before the default deadline on December 16, raising the debt ceiling to about $31.4 trillion.

A similar last-minute crisis developed in 2023 when the government again hit the debt ceiling. President Biden initially said that he would not agree to spending cuts as part of negotiations with Republicans (who had gained a House majority in the 2022 midterms) around the debt limit. However, with the prospect of default again looming, he eventually agreed to spending caps in return for a suspension of the debt limit until January 2025. Biden signed the Fiscal Responsibility Act of 2023 in June 2023, just two days before the US would have defaulted on its debt.

Citing the partisan brinkmanship and constant debt ceiling showdowns in Congress, Fitch Ratings cut the US credit rating from AAA to AA+ in August 2023. Though some observers downplayed the significance of the reduced rating, characterizing credit ratings as subjective and the demand for US treasury bonds as strong, others expressed concern that it harmed the nation's reputation as a safe investment.

There was fresh attention to the debt ceiling issue in 2025, as the suspension of the limit under the Fiscal Responsibility Act expired that January. At the time, the federal deficit was estimated at $36.1 trillion—over the reinstated $31.4 trillion ceiling. However, due to technicalities, the Treasury projected it would not officially risk defaulting for a few more months. Much scrutiny surrounded Republican plans to address the issue, as they were set to narrowly control both houses of Congress and the president following the 2024 elections.

Bibliography

Austin, D. Andrew. "The Debt Limit in 2021." IN11702. Congressional Research Service, 27 Dec. 2021, crsreports.congress.gov/product/pdf/IN/IN11702. Accessed 3 Aug. 2023.

Belz, Sage, et al. "What Is the Federal Debt Ceiling?" Brookings, 30 Dec. 2024, www.brookings.edu/articles/the-hutchins-center-explains-the-debt-limit/. Accessed 8 Jan. 2025.

Cochrane, Emily. "Congress Approves $2.5 Trillion Debt Limit Increase, Sending It to Biden." The New York Times, 14 Dec. 2021, www.nytimes.com/2021/12/14/us/politics/debt-limit.htmlwww.nytimes.com/2021/12/14/us/politics/debt-limit.html. Accessed 3 Aug. 2023.

Coggan, Philip. Paper Promises: Debt, Money, and the New World Order. New York: Penguin, 2012.

"Debt Ceiling Q&A." Committee for a Responsible Federal Budget, 7 Jan. 2025, www.crfb.org/papers/qa-everything-you-should-know-about-debt-ceiling. Accessed 8 Jan. 2025.

"Debt Limit." US Department of the Treasury, home.treasury.gov/policy-issues/financial-markets-financial-institutions-and-fiscal-service/debt-limit. Accessed 8 Jan. 2025.

Luhby, Tami. "The Debt Ceiling Is Back, But No Need to Worry - Yet." CNN, 2 Jan. 2025, www.cnn.com/2025/01/02/business/us-debt-ceiling-trump-yellen/index.html. Accessed 8 Jan. 2025.

Nam, Rafael. "Fitch Just Downgraded the US Credit Rating—How Much Does It Matter?" NPR, 2 Aug. 2023, www.npr.org/2023/08/02/1178215888/fitch-downgrade-credit-rating-deficits-debt-economy. Accessed 3 Aug. 2023.

Rappeport, Alan. "14th Amendment Questions Linger Despite Debt Limit Deal." The New York Times, 31 May 2023, www.nytimes.com/2023/05/31/us/politics/14th-amendment-debt-ceiling.html. Accessed 3 Aug. 2023.

Smith, Robert. “US Debt Ceiling: Definition, History, Pros, Cons, and Clashes.” Investopedia, 28 Oct. 2024, www.investopedia.com/terms/d/debt-ceiling.asp. Accessed 8 Jan. 2025.

Soffen, Kim, Darla Cameron, and Kevin Uhrmacher. “Why Does the Debt Ceiling Exist?” The Washington Post, 7 Sept. 2017, www.washingtonpost.com/graphics/2017/national/debt-ceiling/. Accessed 10 Aug. 2018.