What Does the Debt Ceiling Refer To?

Congress has repeatedly raised this cap on federal debt so the government can continue to borrow money.

Written by Ben Luthi / May 4, 2022

Quick Bites

  • The national debt ceiling is the maximum amount of debt the federal government can carry.
  • Congress has raised the ceiling dozens of times but has never lowered it.
  • A failure to raise the debt ceiling and send the federal government into default could lead to a recession, higher interest rates, a decline in the value of the U.S. dollar, stock market turmoil and more.
  • Continuously raising the debt ceiling can also have lasting consequences for future generations.

The U.S. debt ceiling is a perennial topic of discussion among policymakers and economists. The limit, which is set by Congress, determines how much debt the federal government can have outstanding at any given time.[1]

Since 1960, legislators have permanently raised, temporarily extended or revised the definition of the debt limit 78 separate times. The debt ceiling has never been reduced.[1]

Failure to raise the debt limit could cause sweeping problems for individuals and businesses. And the prospect of it happening raises questions about what the fallout would be when and if the federal government ever reaches its limit on its ability to borrow.

Here's what you need to know about the U.S. debt limit and how it may impact you.

Inside this article

  1. What is the debt ceiling?
  2. Why do we have a debt ceiling?
  3. What if we hit the limit?
  4. What if the government defaults?
  5. If the debt limit gets too high

What is the debt ceiling?

The U.S. debt ceiling is the total amount of money that the federal government can borrow through Treasury bills, notes, bonds and other securities at any one time.[2]

The government uses proceeds from selling these securities to help meet its financial obligations, which include:

  • Social Security and Medicare benefits

  • Salaries for members of the military and civilian workers

  • Interest payments on existing debts

  • Funding for national parks

  • All the other programs the federal government supports [2]

Because the federal government hasn't had an annual surplus since 2001—a surplus occurs when revenues from taxes, duties and other sources exceed total spending—the government has needed to borrow money every year since then.[2,3]

Note that the debt limit doesn’t authorize new spending; rather, it allows the government to meet existing obligations that have already been authorized by Congress and presidents in the past.[2]

The U.S. debt ceiling is rather unique, says Robert Johnson, PhD, professor of finance at the Heider College of Business at Creighton University.

"Other developed, and for that matter even developing, countries around the world seem to operate just fine without the concept of a fixed debt ceiling," he says. "In fact, the only democratic country in the world with a debt ceiling other than the United States is Denmark. And Denmark’s debt ceiling was intentionally set so high following the financial crisis that there is no reasonable potential of its being breached."

Why do we have a debt ceiling?

If the U.S. is alone in having a debt ceiling that needs to be regularly raised, why do we have one in the first place?

For most of the country's history, Congress had free reign over the nation's debt, including interest rates, maturities and the financial instruments used. But as the debt grew, Congress gave the Treasury Department more flexibility over the details.

In 1917, Congress passed legislation to help finance the costs related to World War I and placed its first limit on combined debt issues, though previous debt issues had separate borrowing limits.

Over time, Congress made amendments to the law to give the Treasury Department even more leeway, but in 1941, it put the modern debt ceiling in place.[4]

What happens when the government hits its debt limit?

Once the federal government has reached the debt ceiling, the U.S. Treasury Department can't issue new debt to help cover the bills. There are two things the department can do at that point, barring Congress approving another increase to the debt ceiling.[5]

One is to rely on incoming revenues and cash on hand to cover necessary payments.[5] But since the government has gone two decades without a surplus, that won’t be enough to meet all the government’s obligations.[1]

The other is to take advantage of accounting techniques, such as suspending new investments or redeeming existing investments prematurely, that temporarily reduce the amount of U.S. Treasury securities issued to government accounts. This approach cuts the amount of outstanding Treasury securities, temporarily lowering the total amount of outstanding debt, giving the government a short window to continue to meet its financial obligations.[5]

If the federal government has exhausted these extraordinary measures, it can no longer fund operations beyond its revenue.[5]

In other words, it's similar to having a credit card: You get a credit limit, and once you reach that limit, you can no longer use your card to make payments unless you pay down some of your balance or your issuer raises your limit. Until then, you'll need to use cash to pay your bills.

The U.S. has hit the debt ceiling in the past, but Congress has always stepped in to raise it before the government goes into default.[5]

What happens if the government goes into default?

Because it's never happened, the scope of the impact of the federal government defaulting on its financial obligations is uncertain.

However, politicians and economists anticipate that it would be catastrophic for the nation's economy, likely triggering a recession that would impact both individuals and businesses. Even the threat of default could set off a variety of problems in the U.S. and around the world.[5]

Here are some examples of what could happen:

  • Those who receive benefits via social programs, such as Social Security or food or housing assistance, could see their payments be delayed or even stop.

  • The country's gross domestic product (GDP), which is the total value of all finished goods and services produced within the country's borders, would decrease.

  • Unemployment would increase.

  • Interest rates on mortgage loans, credit cards and other credit products would rise.

  • The government could be hampered in its ability to maintain its national defense; funding for national parks, air traffic controllers and other programs would be under threat.

  • The public health system would no longer be able to function at the highest level.

  • The value of the U.S. dollar would fall as global markets lose faith in the government.

  • The stock market would be thrown into a crisis.[5]

What's more, because the U.S. Treasury's debt securities are used globally as a benchmark "risk-free" asset, a default would send shockwaves throughout the global economy, likely causing a ripple effect.[5]

What happens if the U.S. debt limit gets too high?

Despite political posturing on both sides of the aisle, Congress has consistently made sure that the federal government doesn't default on its financial obligations.

But since the 1980s, when the debt ceiling was under $1 trillion, it's ballooned to around $28.5 trillion in 2021. Experts worry that continuing to raise the debt limit without meaningful measures to reduce the federal government's deficit could result in stagnant economic growth, less flexibility with government spending and an overwhelming financial burden on future generations.[5]

The primary problem with the debt limit is that it doesn't appear to serve much of a real purpose. "The debt ceiling doesn’t actually do anything to promote fiscal restraint," says Johnson. "Yet every time it needs to be raised it causes tremendous uncertainty for markets and discomfort with investors throughout the world."

As a result, organizations like the Committee for a Responsible Federal Budget have called on policymakers to consider reforms to the debt ceiling, such as:

  • Link changes in the debt limit to certain fiscal targets, so there would be no need to increase the ceiling if Congress meets its targets.

  • Consider the debt limit when making decisions about spending and revenue rather than after the fact. "The time to show fiscal restraint is when the appropriations are being approved, not when they come due," says Johnson.

  • Apply the debt limit to other economic measures, such as the amount of debt held by the public or the government's debt as a percentage of the country's GDP.

  • Replace the debt limit entirely and set a limit on the government's future spending instead.[4]

Unfortunately, it's unclear how much traction any of these recommendations have gotten among legislators. However, it can give individuals and business owners information and solutions to bring to their representatives and apply pressure for meaningful change to how the government operates and handles its debt.

Article Sources
  1. U.S. Department of the Treasury. "Debt Limit." https://home.treasury.gov/policy-issues/financial-markets-financial-institutions-and-fiscal-service/debt-limit.
  2. The White House. "The Debt Ceiling: An Explainer." https://www.whitehouse.gov/cea/written-materials/2021/10/06/the-debt-ceiling-an-explainer/.
  3. Data Lab. "Sources of Revenue for the Federal Government." https://datalab.usaspending.gov/americas-finance-guide/revenue/categories/.
  4. House Committee on the Budget. "The Debt Ceiling: An Explainer." https://budget.house.gov/publications/fact-sheet/debt-ceiling-explainer,
  5. Committee for a Responsible Federal Budget. "Q&A: Everything You Should Know About the Debt Ceiling." https://www.crfb.org/papers/qa-everything-you-should-know-about-debt-ceiling.
  6. The White House. "Life After Default." https://www.whitehouse.gov/cea/written-materials/2021/10/06/life-after-default/.

About the Author

Ben Luthi

Ben Luthi

Ben has been writing about money since 2013. He's been on staff at NerdWallet as a credit card writer and for Student Loan Hero, where he covered student loans and other personal finance topics. Ben's work has appeared in U.S. News, The New York Times, Experian, FICO, Credit Karma, Bankrate and more

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