Why Is There a Debt Ceiling, Anyway?

The U.S. government reached its debt ceiling of $31.4 trillion today (Jan. 19), Treasury Secretary Janet Yellen said. The debt ceiling is the maximum amount of money the federal government is allowed to borrow, via issuing treasury bonds, to pay its bills. Reaching the borrowing limit means the Treasury Department has to find other ways, known as “extraordinary measures,” to fulfill is financial obligations, such as paying interest on its debt and funding Social Security and Medicare benefits.

That is unless Congress raises the debt limit to allow additional borrowing, which is what Yellen is urging in a letter to the newly elected House Speaker Kevin McCarthy.

Meanwhile, the Treasury will suspend new spending in some public programs from now through June 5 to ensure the government doesn’t run out of money. But if the Treasury and Congress fail to reach an agreement to increase the borrowing limit by then, the U.S. government risks defaulting on its debt. It has never happened before but could lead to serious economic consequences.

A history of the debt ceiling

The debt ceiling was created during the World War I under the Second Liberty Bond Act of 1917. Prior to establishing the debt ceiling, Congress had to vote to approve each issuance of Treasury bonds, which can be a cumbersome process.

A debt ceiling allows the Treasury Department to issue bonds without having to go through Congress each time until the ceiling is reached. It thus makes the government’s fundraising process more efficient and encourages fiscal responsibility because, in theory, there is a limit on how much the Treasury can borrow.

In reality, however, the debt ceiling has been raised or suspended numerous times since its creation—from $11.5 billion in 1917 to $31.4 trillion as of 2021 (unadjusted for inflation). Over the past decade alone, the debt ceiling was raised or suspended eight times to avoid a government default, leading its critics to question its effectiveness and necessity.

So, why is there still a debt ceiling?

Despite the debt ceiling rarely being an effective limit on government spending, lawmakers have kept it and often use it as a leverage against the opposite party to achieve their budgetary goals.

Conflicts over the debt ceiling usually occur between Congress and the executive branch, of which the Treasury Department is a part. Standoffs often happens when a Democratic President is in office and Republicans control Congress, sometimes leading to a government shutdown.

That was the case in two recent debt ceiling crises in 1995 and 2011.

In 1995, the national debt was under $5 trillion and the Treasury Department needed to increase the limit. House Speaker Newt Gingrich, a Republican, refused to raise the debt ceiling unless President Bill Clinton would cut government spending. Clinton refused to make the cuts, which led to two government shutdowns totaling 26 days. The White House and Congress eventually agreed on a balanced budget with modest spending cuts and tax increases.

In 2011, President Barrack Obama faced a similar crisis with the House, led by Republican Speaker John Boehner. The U.S. came so close to a default that year that Standard & Poor’s downgraded the US credit rating to AA+ from AAA.

Congress eventually resolved the crisis by agreeing to raise the debt ceiling by $2.4 trillion to $16.4 trillion. In return, the Obama administration agreed to reduce future government spending by $900 billion over a 10-year period and form a special committee to discuss spending cuts.

By early 2013, the Treasury had maxed out its borrowing limit again, and the G.O.P.-controlled Congress attempted to defund the Affordable Care Act by leveraging the debt ceiling. An agreement to suspend the debt ceiling was passed within a day, on Feb. 4, 2013, right before the Treasury was expected to run out of money.

In past debt ceiling crises, the White House and Congress always managed to reach an agreement to avoid a government default. Given the Treasury's short-term spending cuts, the Biden administration and Congress have at least June to come up with a solution.