Congress must act soon to increase the debt limit so that the United States can continue borrowing the funds needed to run the government and fulfill the budgetary obligations incurred by prior Congresses and presidential administrations. Failure to increase the limit would have catastrophic consequences for the U.S. and global economies, as well as for all Americans, who rely on the public services supported through the federal budget—from Social Security and Medicare to food safety inspection, air traffic control, school nutrition, and environmental protection. Since its enactment in 1917, Congress has routinely voted to approve or suspend the limit, voting to do so 102 times since the end of World War II. However, this year, some members of the new Republican majority in the U.S. House of Representatives have threatened to block an increase, which would leave the federal government unable to pay its bills and cause irreparable harm to the economy and all Americans. This article examines the history of the debt limit, why it is an issue now, and the consequences of Congress failing to act on a timely basis. It also provides background that informs the current debate.
Where did the debt limit come from?
For most of the nation’s history, there was no debt ceiling. Until 1917, Congress approved—and, in fact, designed—every security issued to raise funds to finance the government. Congressional approval was linked to a specific purpose—such as construction of the Panama Canal—and authorizing legislation often prescribed the type of debt, its term, and other details. In the Second Liberty Bond Act of 1917, enacted to allow financing the cost of waging World War I, Congress gave the Treasury Department greater discretion regarding the types of debt that could be issued but established a limit on the amount of debt the nation could incur. The debt limit in its current form was enacted in 1939 in response to a request from President Franklin D. Roosevelt and Treasury Secretary Henry Morgenthau to replace the individual limits on bonds with an aggregate limit on the total amount of debt.
Why is the debt limit an issue now?
On January 19, 2023, Treasury Secretary Janet Yellen announced that the nation’s debt had reached the statutory limit and that the Treasury Department would use “extraordinary measures” to manage the nation’s cash and debt to avert default. However, the current strategy is temporary and the exact date that the nation will no longer be able to meet its obligations is subject to considerable uncertainty. For example, the Congressional Budget Office estimates that the Treasury Department will exhaust available measures sometime between July 2023 and September 2023. Congress must vote to suspend or raise the limit before that time in order to allow the government to borrow sufficient funds to meet its ongoing legal obligations.
What happens if Congress doesn’t increase the debt ceiling?
If the debt ceiling is not increased or suspended, once the Treasury Department exhausts available extraordinary measures, the federal government will be forced to rely on incoming revenues to pay its bills. This would result in a delay in payments for some government activities and could result in a default on the nation’s debt. This would also affect hundreds of millions of Americans: those who rely on Social Security and other federal programs, federal workers, state and local governments that administer federally supported programs, and the thousands of vendors that supply goods and services to the federal government. Federal workers would be asked to work without pay or, alternatively, could be furloughed, leaving their families without the paychecks needed to meet their own financial obligations. Vendors and contractors would similarly be left without the payments needed to cover their own costs of doing business, and states and localities would be left on the hook to provide services without legally obligated federal funds. Even if amounts owed were eventually paid by the federal government, prioritization would result in a form of forced borrowing, with beneficiaries, workers, vendors, and state and local governments made to bear the cost of congressional inaction on the debt ceiling.
Breaching the debt limit would have a catastrophic impact on the economy
Breach of the debt limit would result in lasting and catastrophic harm to the U.S. economy, the global financial system, and the everyday lives of all Americans. Financial markets would lose faith in the dollar, the nation’s credit rating would be downgraded, and interest rates would rise, increasing the cost of borrowing for consumers and American businesses. The U.S. economy—which is still recovering from the COVID-19 pandemic-related downturn—would be thrown into a recession.
Economist Mark Zandi notes that if default lasted for even a few weeks, the consequences would be catastrophic:
Based on simulations of the Moody’s Analytics model of the U.S. and global economies, the economic downturn ensuing from a political impasse lasting even a few weeks would be comparable to that suffered during the global financial crisis. That means real GDP would decline almost 4% peak to trough, nearly 6 million jobs would be lost, and the unemployment rate would surge to over 7%. Stock prices would be cut almost in one-third at the worst of the selloff, wiping out $12 trillion in household wealth.
Default would result in irrevocable damage to the nation’s credit rating
Default on the United States’ debts would result in irrevocable damage to the nation’s credit rating, causing interest rates to rise and substantially increasing the cost of federal borrowing. A 1979 technical glitch that caused a slight delay in Treasury bond payments, for example, caused the cost of federal borrowing to spike and remain high for several months. While this payment delay was brief and accidental, it added tens of billions of dollars to federal borrowing costs. Deliberate default would cause significantly worse damage. Delayed payments would also increase the ultimate cost of federal obligations due to interest payments owed to federal vendors under the Prompt Payment Act and to taxpayers owed refunds by the IRS.
What options are available for increasing the limit?
Congress has multiple options for raising the debt limit: It can increase the limit to allow for additional borrowing, temporarily suspend the limit, or vote to eliminate the limit entirely. During the Trump administration, Congress voted to suspend the debt ceiling—allowing the issuance of an unlimited amount of debt—in September 2017, February 2018, and August 2019. Notably, two of the suspensions occurred under Republican control of both the House and Senate.
How many countries have similar rules?
The United States is 1 of just 2 countries that have a binding fixed-dollar debt limit. The other, Denmark, has a limit that is substantially higher than its current debt. While the EU member countries are required to keep public debt below 60 percent of a country’s gross domestic product (GDP), this requirement has not been consistently enforced, and several other countries limit public debt to a percentage of GDP.
What’s wrong with debate over the need to increase the limit?
Arguments that the debt limit imposes “fiscal discipline” are specious; not only does Congress already have power over the nation’s purse strings, the time to set spending policy is when spending is incurred, and it is inappropriate to limit the nation’s ability to pay its bills once they’ve been legally incurred. A vote to increase or suspend the debt limit has no impact on the nation’s spending obligations and no impact on the size of the deficit; it simply allows the nation to borrow funds needed to meet the obligations incurred through other legislation. As conservative economist and former Congressional Budget Office director Douglas Holtz-Eakin has said, “Raising the debt limit is about our past decisions.”
What’s wrong with the House Republican proposal to prioritize which bills get paid?
Experts broadly agree that the House majority’s proposals to prioritize payment of some of the nation’s obligations while deferring payment of others is unworkable and untenable, and that it would simply result in default by another name—a deliberate failure to pay a portion of the nation’s financial obligations. Treasury Secretary Yellen made that point clear when she stated, “Treasury systems have all been built to pay our bills, to pay all of our bills when they are due and on time and not to prioritize one form of spending over another.” An analysis by the Center for American Progress shows that incoming revenues would be insufficient to pay ongoing operating costs of potential priorities in many months and would necessitate deep cuts to programs unlikely to be deemed priorities.