Debt Ceiling Primer
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Debt Ceiling Primer Updated January 21, 2011 The debt ceiling has been getting a lot of attention recently. A new Congress filled with lawmakers who promised to bring fiscal order must grapple with raising the debt ceiling, which currently stands at $14.294 trillion, when the limit is reached sometime this spring. The Treasury Department projects the ceiling could be reached sometime between March 31, and May 14, 2011 Following is a short primer on the debt ceiling. What is the debt ceiling? The debt ceiling is the legal limit on the gross level of federal debt that the government can accrue. The limit applies to almost all federal debt (a small amount of total debt is not subject to the limit), including the debt held by the public, and what the government owes to itself through various accounts such as the Social Security trust funds. When was the debt ceiling established? The first iteration of the debt ceiling was established in 1917 and set at $11.5 billion under the Second Liberty Bond Act. Prior to this, Congress was required to approve each issuance of debt separately. The ceiling was enacted to simplify the process and enhance borrowing flexibility. In 1939, Congress created the first aggregate limit covering nearly all government debt, and set that at $45 billion, about 10 percent above the total debt at that time, which was $40.4 billion. How much has the debt ceiling grown? Since it was established, the debt ceiling has been increased nearly 100 times. During the 1980s, it increased from less than $1 trillion, to nearly $3 trillion. Over the course of the 1990s it doubled to nearly $6 trillion, and in the 00’s, it doubled again to well over $12 trillion. In February of 2010, it was raised by $1.9 trillion, bringing the debt ceiling to its current level of $14.294 trillion. | |
Fig. 1: Statutory Debt Limit and Gross Federal Debt (billion)
What happens if the debt ceiling is breached? Once the government hits the debt ceiling, it is no longer allowed to issue debt. In this case, borrowed funds would not be available to pay the most basic government bills from salaries, to utility bills, to Social Security payments. Eventually, the government could even default on its debt. Such an action would roil global financial markets, as both domestic and international markets depend on relative economic and political stability, and specifically are influenced by the stability of Can this be avoided without congressional action? The Department of Treasury can use a variety of accounting gimmicks to postpone hitting the threshold. For example, it can prematurely redeem treasury bonds held in federal employee retirement savings plans, halt contributions to government pension funds, or accumulate certain special types of debt which are not subject to the limit. While these actions are within the Treasury’s authority, they do not make for very good policy, and can have negative economic, financial, and political consequences. What should policymakers do? While failing to raise the debt ceiling would create a debt crisis, failing to control the debt could eventually do the same. If investors believe the Unfortunately, rather than balancing the nation’s books, members of both parties have enacted new tax cuts and spending increases – in good times and in bad – and put the costs on the nation’s credit card. When confronted with exceeding the debt limit, they have simply raised it time and again implementing few policies to bring the debt under control. This time around, for the sake of our budget and economy, we need to do better. When they do vote to raise the ceiling, policymakers must include along with this a set of measures which will substantially improve our medium and long-term fiscal position – preferably enough to bring the debt down to 60 percent of GDP over the decade and stabilize it below that level. Any long-term increase in the debt ceiling should be conditional on the inclusion of such measures. CRFB will track the ongoing debt ceiling debate at The Bottom Line.
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