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What is the debt ceiling or debt limit?

The debt ceiling, also known as the debt limit or statutory debt limit, is the total amount of money the U.S. Treasury can borrow.

The limit is set by Congress.

The US debt limit was reset to $18.113 trillion in March 2015, about $1 trillion more than where it stood in February 2014. The U.S. government has hit the debt ceiling several times. In order to be able to keep paying its bills, the Treasury uses “extraordinary measures” which buy it more time for the ceiling to be increased.

Debt limit does not authorize new spendingAccording to the U.S. Treasury, the debt ceiling only authorizes the government to borrow for already-approved spending to meet existing legal obligations, including tax refunds, interest on the national debt, military salaries, Social Security benefits, Medicare, and other payments.



 

The debt ceiling was created in 1917 under the Second Liberty Bond Act, which placed a limit on the amount of bonds the U.S. can issue.

Does the U.S. government borrow much?

Yes. Since the 1980s, US government borrowing has been progressively growing as a proportion of the national economy.

When the 2007 financial crisis hit, government revenue fell significantly, resulting in a further increase in the gap between income and expenditure.

The 2007 financial crisis developed into what people today call The Great Recession; federal finances deteriorated considerably as the government tried to stimulate the economy and stabilize things, especially the financial sector. To do these things it had to spend even more money.

Put simply: The U.S. treasury had to spend more while its income had dropped.

According to Trading Economics, the US recorded a government debt-to-GDP of 101.53% in 2013, which contrasts with the average of 60.81% average from 1940 to 2013. In 1946, it reached a record high of 121.7% and a record low in 1974 of 31.7%. Us government debt jumped considerably after the 2008 financial crisis.

The debt ceiling has been rising for many decades:

Debt ceiling

Can the U.S. President bypass Congress and raise the debt ceiling?

No. The American President does not have the power to raise the debt ceiling on his or her own.

The debt ceiling is set by members of the two houses Congress – the Senate and the House of Representatives.

How many times has the debt ceiling been raised?

The U.S. Treasury says that Congress has always acted when the debt limit needed to be raised.

Congress has acted 78 times since 1960 to revise the definition of the debt ceiling, permanently raise it, or allow a temporary extension – 29 times under Democratic and 49 times under Republican presidents.

Why has it become harder to negotiate the debt ceiling today?

In 2010, the Republicans gained control of the House of Representatives from the Democrats. Since then, negotiating the debt ceiling, as well as a wide range of other legislation has become much more difficult. Budget fighting between the two parties, unfortunately, has become the norm.

Basically, the Republicans say that America has been borrowing too much for too long and spending has to be brought under control for the short-, medium- and long-term good of the country. During the last debt ceiling negotiations, the Democrats agreed to try to cut spending.

The Democrats say that there are too many Americans (approximately 50 million) with no health insurance cover, a situation unique only to the U.S. among the advanced economies, and that money should be spent on bringing healthcare to more people.

What would happen if Congress failed to increase the debt limit?

The U.S. Treasury writes:

Failing to increase the debt limit would have catastrophic economic consequences. It would cause the government to default on its legal obligations – an unprecedented event in American history. That would precipitate another financial crisis and threaten the jobs and savings of everyday Americans – putting the United States right back in a deep economic hole, just as the country is recovering from the recent recession.”

However, Jeffrey Dorfman writes in Forbes that reaching the debt ceiling does not mean the U.S. government will default on its debt obligations, it is written in the 14th Amendment (Section 4) that defaulting is illegal. In other words, the government could not default even if it wanted to.

What happens if the debt ceiling is not raised is that the government is forced to prioritize its expenses. In other words, spending in some departments and programs would have to be reduced to meet debt obligations, the government could also place debts in order of priority and delay payments regarding the “less urgent ones”. This could mean Medicare doctors, veterans, soldiers, some seniors, and many others waiting a long time for their money.

Dorfman wrote “In simple terms, the government would have to spend an amount less than or equal to what it earns. Just like ordinary Americans have to do in their everyday lives.”

Video – The Debt Ceiling

This easy-to-understand video by the Wall St. Journal Digital Networkexplains what the debt ceiling is and what can happen if Congress cannot agree to raise borrowing limits. The video was made a few months ago, but is relevant to any past or present debt ceiling situation.