What is the ‘Debt Ceiling’?

The debt ceiling, also known as the statutory debt limit, is the legal cap or limit set by the government on the amount of national debt that can be incurred; it is the maximum amount a government can borrow by issuing bonds. The debt ceiling puts a check on government spending. The US debt ceiling is set by the US Congress.

When ongoing operations cannot be funded by Federal revenue alone, the Federal government borrows money by creating and selling securities such as savings bonds.

When a government issues debt securities such as bonds, it is accepting a loan. The lender (purchaser of the government-issued security) receives interest payments on the principal on the maturity of the bond; the principal is also repaid. These government-issued securities are deemed to be safe, as they are backed by the government and the possibility of a default is extremely low.

Other world bodies employ similar methods (issuance of bonds) to raise funds. In 2019, the World Bank raised funds using tokenized bonds.

How did the Debt Ceiling Come About?

Before the debt ceiling was introduced, the US Congress issued debts with a targeted limit for specific purposes and projects. During World War I, it became difficult for Congress to make targeted spending forecasts, as the war came with unforeseen, unpredictable costs.

The debt ceiling was first established in the US in 1917, during World War I, as part of the Second Liberty Bond Act. The debt ceiling gave the US Treasury the liberty and flexibility to issue securities to borrow funds, without requiring much congressional superintendence, as long as the total debt remains under the statutory debt limit.

How Many Times Have the US Debt Ceiling Been Raised?

When the government approaches its debt limit, the Treasury Department employs what it calls ‘extraordinary measures,’ which can include disinvesting some government funds. These ‘extraordinary measures’ allow the government to continue to operate for a limited period, stalling the time it would take to reach the debt limit, while Congress deliberates on raising the debt ceiling. The topic of raising the debt ceiling often leads to a showdown in Congress.

Without applying these ‘extraordinary measures’ or raising the debt limit, the Federal government risks reaching a point of defaulting on its many obligations. When the government reaches its debt limit and then defaults on its obligations, it leads to a catastrophic, crippling effect on the economy. ‘Extraordinary measures’ were first used by the Treasury Department in 1985 and have been employed on at least 16 different occasions since then.

Since 1960, the debt ceiling has been raised, temporarily extended, or its definition revised by Congress 78 different times. The US debt ceiling was raised 18 times under Ronald Reagan, eight times in Bill Clinton’s administration, seven times under George Bush, and five times under Barack Obama.

The request, in 1995, by the Clinton administration to raise the debt ceiling led to an intense debate in Congress; Republicans demanded $245 billion in tax cuts, among other demands. There was a face-off in Congress which led to a debt ceiling crisis. Similar debt ceiling crises have occurred over the years, in the US.

Recent Events on the US Debt Ceiling

The last increase in the debt ceiling was in December 2021; the debt ceiling was raised by $2.5 trillion. The increase was initially expected to last until at least July 2023. The US Treasury Secretary Janet Yellen wrote a letter to Congress, last Friday, warning that the Treasury Department would begin to employ ‘extraordinary measures’, as the US will hit its debt limit of $31.4 trillion on Thursday. There is worry about how long the Department of the Treasury could use these ‘extraordinary measures’ to delay a government default.

There is a looming showdown between Democrat and Republican members of Congress. The Democrats in Congress are in support of a swift raise in the debt ceiling, while their Republican counterparts want guarantees on spending cuts before they would offer their support to raise the debt limit. In her letter, Secretary Yellen wrote: “Failure to meet the government’s obligation would cause irreparable harm to the US economy, the livelihoods of all Americans, and global financial stability.” Yellen urged Congress to act promptly to “restore the full faith and credit of the United States.”

Of all the countries of the world, only the US and Denmark have debt ceiling legislation.