This introduction is the first in a series of articles about the Federal debt limit. Future articles will explore the procedural, political, and economic aspects of debates over the debt limit.
The Federal debt limit (also called the debt ceiling) is a cap, determined by law, on the amount of money that the Federal Government may owe its creditors. The debt limit is distinct from the Federal debt itself, which is the actual amount of money that the Government owes. Thus, the debt itself is usually lower than the debt limit. Increases in both the debt limit and debt are controversial since they invite accusations that either the Administration or the congressional majority (or both), regardless of party, are spendthrifts. Adjustments to the debt limit are also fraught since they raise the prospect that the Government will be unable to fulfill its financial obligations, which many economists warn would have disastrous effects on the economy.
Changes to the debt limit require an act of Congress approved by the President. Historically, Congress has set a certain dollar limit and the Executive Branch is free to borrow up to that amount without explicit congressional approval each time it does so. In recent years, Congress has also suspended the debt limit, in which case the borrowing cap does not apply for a specified period. When the suspension period ends, the debt limit is automatically adjusted to accommodate the Treasury Department’s new borrowing.
While the Treasury can “rollover” its debt instruments as they come due, the government must pay the interest payments on the outstanding debt each year. This is known as debt service. In Fiscal Year 2020, the Federal government paid $345 billion in interest payments.[i] (In recent years, interest payments have normally been the fourth largest budget item, though coronavirus pandemic spending overtook it in Fiscal Year 2020.)
The U.S. Constitution authorizes Congress “to borrow Money on the credit of the United States” (Article I, section 8). The debt limit is the method Congress currently uses to exercise this power of the purse, yet it could exercise this power another way. If it wished, it could require the Executive Branch to seek congressional approval for each issuance of debt, as it has in the past. Or Congress could decline to borrow money at all and finance government activities a different way.
The debt limit may be found in Title 31, section 3101 of the U.S. Code (31 USC §3101). Section 3101(b) lists a specific dollar figure for the debt limit. At this writing, it states that the debt “may not be more than $14,294,000,000,000” ($14.3 trillion). But appearances are deceiving. Over the last decade, Congress has suspended the debt limit numerous times, and both the debt limit and the actual debt are much higher. For instance, according to the September 3, 2021, Daily Treasury Statement from the Treasury Department, the public debt subject to limit stands at more than $28.4 trillion—more than twice the value stated in the U.S. Code.[ii] Other sections of the same chapter of the U.S. Code provide the Secretary of the Treasury with the authority to borrow via various instruments like bonds or Treasury notes, subject to presidential approval. Federal law provides the Treasury Secretary with wide latitude in determining the terms of debt issuances, with relatively few restrictions. These sections do not specify that the Secretary should borrow funds for specific purposes (like war or social programs) but generally “for expenses authorized by law.”[iii] With the significant leeway Congress provides in borrowing authority, the debt limit is a restraint upon Executive Branch activities.
The American government usually runs a deficit each fiscal year, and debt chronically piles upon debt. The accumulation of debt means that, sooner or later, the Government will hit the debt ceiling, if Congress does not adjust it. If the Treasury hits the limit, it is no longer authorized to acquire more debt to pay off the obligations the government has incurred. Typically, the Treasury Department can take “extraordinary measures” to continue paying the government’s obligations, but eventually, it exhausts these. Economists and fiscal policy experts warn that if the government defaults on its debts, its finances, and both the domestic and international economies will suffer significantly as a result. When it appears that the government will hit the debt limit in the short term, the Secretary of the Treasury typically sends a formal request to Congress to increase the debt limit so the Department can continue borrowing to pay for government obligations.
How often has the debt limit been adjusted?
The structure of the debt limit and the ways Congress has adjusted the limit have changed significantly over the years, so each of the 99 laws enacted since 1940 did not simply increase the debt limit. For instance, prior to 1980, the Government had separate permanent and temporary debt limits, and Congress occasionally passed laws delaying the expiration date of the temporary debt limit without increasing it.
Does the debt limit allow the government to pay for past spending decisions only? Or does it allow for future spending decisions too?
Members of Congress, administration officials, journalists, and others often say that raising the debt limit simply allows the government to pay for obligations already incurred, and not future obligations, with the implication being that raising the debt limit should not be the occasion for controversy. For instance, one journalist wrote, “Lifting it would not authorize new spending or debt; it would simply enable the government to borrow money to pay the bills that Congress has accrued.”
Statements such as these can be quite misleading. They are accurate in the sense that debt limit increases do not authorize government officials to enter into financial obligations or appropriate money from the Treasury. Congress enacts different authorization and appropriations legislation apart from the debt limit, and these bills, along with revenue legislation, determine the level of the deficit or surplus, both of which directly affect government borrowing.
Nonetheless, such statements oversimplify the debt limit, since an increase can allow for future borrowing for not-yet-authorized spending. If Congress authorizes only a modest increase in the debt limit, it may allow for the Treasury Department to borrow only enough to meet current obligations which have already been authorized. If Congress increases the debt limit by a substantial amount or suspends it, it may provide enough room to finance both obligations that have been incurred and those that Congress will authorize in the future. For instance, consider the debt limit suspension enacted on August 2, 2019, the Bipartisan Budget Act of 2019. This law suspended the debt limit until July 31, 2021. Between the time the law was enacted and the expiration of the suspension, Congress authorized incredible amounts of new spending, thanks in part to the coronavirus pandemic relief which no one had anticipated when the law was passed, and the debt limit suspension provided the means to borrow to finance that spending.
When it comes time to increase the debt limit, it is because Congress needs to raise it to prevent a default on obligations already incurred. When faced with the prospect of default, noting that increasing the debt limit may pave the way for borrowing for future obligations may seem pedantic. Yet Members of Congress need to understand the significance of what they are voting on. Also, clarity on this point is important since it implicitly raises questions about how Congress will both appropriate and fund the government: Will Congress continue to spend as it does? Will it adjust its revenue levels? Is Congress implicitly conceding defeat on balancing its budgets? Whenever Congress needs to adjust the debt limit, such questions can guide Congress in its decisions on how to change the ceiling.
What are the politics of debt limit adjustments?
Raising the debt limit is politically embarrassing, but most politicians prefer the embarrassment to the economic pain that would result from a government default. A party that controls at least one Chamber of Congress will work to adjust the debt limit, even if it seeks fiscal reforms while doing so. If a party is in the minority in both Chambers, and does not control the White House either, it will often simply oppose increases to the debt limit as a way of protesting the majority’s fiscal policies. So, in general, when a party has control of a unified government, it is more common to see more partisan votes for debt limit adjustments. For instance, when the Republicans held the House, Senate, and White House from January 2003 until January 2007, Democrats in both Chambers by and large voted against the debt limit increases. If there is a divided government, votes may be more bipartisan since both parties are then responsible for running the government. Again, an example from the Presidency of George W. Bush illustrates the point: Early in his tenure, the Democrats had a slight majority in the Senate, and in that Chamber, the vote was a bipartisan 68 in favor, with 29 opposed. By contrast, the Republican-controlled House passed the increase by a vote of 215 to 214. (Only three Democrats voted for the increase, so their votes were decisive in this case.)
Perhaps one of the best examples of debt limit politics was former President Barack Obama. When he was in the Senate, and George W. Bush was President, he opposed raising the debt limit in March 2006, criticizing the Administration for deficit spending. “The fact that we are here today to debate raising America’s debt limit is a sign of leadership failure. It is a sign that the U.S. Government can’t pay its own bills. It is a sign that we now depend on ongoing financial assistance from foreign countries to finance our Government’s reckless fiscal policies,” he said during debate over H.J. Res 47, which increased the debt limit in 2006.[vi] However, as President, Obama was highly critical of the Republican majority in Congress for using the debt limit as leverage during a protracted negotiation that eventually led to a 10-year budget sequester, spending caps, and hundreds of billions in spending reductions. The same year Obama opposed the debt limit increase, current President Joe Biden joined him in opposition. He now finds himself in the same position as President Obama, needing a change in current law to prevent a Government default.
But sometimes the standard political calculations are more complicated. For instance, in 2017, when the Republicans had a unified government, Senate Minority Leader Chuck Schumer and House Minority Leader Nancy Pelosi negotiated a three-month extension of the debt limit as part of a bill to provide disaster relief aid for areas affected by Hurricanes Harvey and Irma and to provide short-term funding for the government. Just hours before, Speaker Paul Ryan had called the Democrats’ three-month debt limit suspension a “ridiculous” idea. He and Senate Majority Leader Mitch McConnell had wanted an 18-month extension of the debt limit instead. But recognizing the President’s agreement with the Democrats, McConnell pledged to bring up legislation to put it into effect. It passed 316-90 in the House and 80-17 in the Senate.
Where did the debt limit come from? How has it changed over time?
The debt limit was created with the enactment of the Second Liberty Bond Act of 1917 (P.L. 63-43). Prior to this act, Congress often authorized debt for specific purposes (such as fighting wars) and specified the kinds of debts the Treasury Department could take on, along with terms and conditions. With the Second Liberty Bond Act of 1917, Congress began to give the Treasury Department greater autonomy and loosened the restrictions it imposed on sales of debt. The Act delegated the Secretary of the Treasury significant, though not unlimited, authority to determine features of debt issuances such as maturity dates, interest rates, and the like. Additionally, while most of the provisions of the Second Liberty Bond Act of 1917 aimed at prosecuting the First World War, but it also generally authorized the Treasury Secretary “to borrow from time to time…to meet public expenditures authorized by law, such sum or sums as in his judgment may be necessary,” up to an aggregate limit of $4 billion.[vii] Unlike today, however, the country, however, had multiple debt limits.
Over the 1920s and 1930s, Congress continued to give the Treasury Secretary more and more flexibility over managing the debt, though during this period it still maintained some controls, such as different limits on different kinds of debt. In July 1939, Congress finally enacted a single, comprehensive debt limit of $45 billion, covering nearly all the government’s debts. Nonetheless, it still maintained distinct permanent and temporary debt limits.
In the 1980s, we see some important changes in how Congress enacted changes to the debt limit. In 1982, Congress enacted Public Law 97-258 which recodified laws relating to fiscal administration, including the debt limit. The law set the debt limit at $400 billion. Acts adjusting the debt limit no longer amended the Second Liberty Bond Act; instead, they referred to the U.S. Code. The next year, Congress abolished the distinction between the permanent and temporary debt limits, keeping a single permanent limit. (Yet even after this, it still enacted temporary increases in the debt limit.) From the creation of the debt limit in 1917 until 2011, adjustments to the debt limit generally consisted of simple increases, where Congress substituted a higher dollar amount for the previous lower one, whether in the permanent or temporary debt limits.
Beginning in 2011, Congress embarked on novel ways of discharging its constitutional power to authorize debt. On August 2, 2011, President Barack Obama signed the Budget Control Act of 2011 (BCA), which created a complex series of mechanisms to raise the debt limit that year. A product of intense negotiations over several months, Congress enacted the law was shortly before the debt limit was reached. The BCA provided the Treasury Secretary with the authority to borrow an additional $900 billion, divided into two installments, if the President certified that the government was within $100 billion of the debt limit. Upon the President’s certification, the law provided for an automatic increase of $400 billion. It also provided for Congress to enact a joint resolution disapproving the President’s authority within a specific timeframe. If Congress failed to enact the joint resolution—which requires the President’s signature—the debt limit would rise by an additional $500 billion. The $400 billion and $500 billion increases in the debt limit equaled the $900 billion in additional borrowing authority granted to the Treasury Secretary.
In addition to the $900 billion increase in the debt limit, Congress provided for an additional, variable increase of at least $1.2 trillion and at most $1.5 trillion. Again, the President was to trigger the increase in the debt limit by sending Congress a certification that the Federal debt was within $100 billion of the limit. Likewise, Congress was given the opportunity to disapprove the increase. The variable size of the debt limit increase was particularly noteworthy. Congress laid out three scenarios to determine the size by which the debt limit would increase:
- Scenario 1: Minimum Guaranteed Increase. At a minimum, it would go up by $1.2 trillion.
- Scenario 2: Supercommittee Deficit Reduction Plan. The law also created a bipartisan, bicameral committee, the Joint Select Committee on Deficit Reduction, to propose ways to reduce the deficit by $1.5 trillion over a decade. The “Supercommittee,” as it was colloquially called, was authorized to report legislation that Congress was required to consider under special procedures. If Congress enacted the legislation, which was supposed to reduce the deficit between $1.2 trillion and $1.5 trillion over 10 years, the debt limit would be increased by an amount equal to that of the legislation’s savings.
- Scenario 3: Balanced Budget Amendment. Finally, the act also provided for votes on a balanced budget amendment to the Constitution. If Congress agreed to such a joint resolution and sent them to the states for ratification, the debt limit would rise by $1.5 trillion.
If both the Supercommittee produced a plan and the balanced budget amendment was agreed to, the debt limit would rise by $1.5 trillion, notwithstanding the size of deficit reduction recommended by the Supercommittee. Neither the balanced budget amendment was agreed to nor did the Supercommittee succeed, so the debt limit rose by $1.2 trillion. No law raising the debt limit before or after the Budget Control Act of 2011 was so complex.
Since 2011, the laws adjusting the debt limit have been less complex than the Budget Control Act, but still a departure from historical practice. The debt limit increases which the Budget Control Act of 2011 authorized were sufficient to allow the government to borrow through early 2013. Beginning in early 2013, Congress began addressing potential breaches of the debt limit by suspending the debt limit entirely. Laws suspending the debt limit contain a provision to the effect of: “Section 3101(b) of title 31, United States Code, shall not apply for the period beginning on the date of the enactment of this Act and ending on [date].” (Section 3101(b) of title 31 of the U.S. Code is where the debt limit is found.) On the day following the date listed, the debt limit is automatically readjusted by the amount the Treasury borrowed to pay for obligations incurred prior to the expiration of the suspension. To date, Congress has enacted 7 laws providing for a suspension in some form or another: two in 2013 and one each in 2014, 2015, 2017, 2018, and 2019. The second of the 2013 debt limit law, enacted on October 17, required the President to send a letter to Congress certifying that a suspension of the debt limit was necessary to prevent a default. Such a certification would trigger a suspension that was to last until February 7, 2014. Upon receiving such a certification, Congress had 22 days to enact a joint resolution disapproving of the suspension. If such a joint resolution passed into law, it would terminate the suspension immediately and the limit would be increased by the level of debt acquired during the time of the suspension.
Initially, debt limit suspensions were comparatively short, but have tended to grow in duration. The first two laws suspending the debt limit were in effect for 105 days (P.L. 113-3) and 112 days (P.L. 113-46). Beginning in 2014, suspensions have generally been longer, and all but one have lasted for over a year, ranging from 386 days to 730 days. The single exception to this trend was a debt limit suspension lasting for 92 days, but this was wrapped in a short-term continuing resolution to keep the government funded.[viii]
The latest debt limit suspension expired on July 31, 2021, and the Treasury Department estimates it will run out of cash and “extraordinary measures” to continue fulfilling its obligations sometime in October.[ix]
[ii] U.S. Department of Treasury, “Daily Treasury Statement,” September 3, 2021. Available at: https://fiscaldata.treasury.gov/datasets/daily-treasury-statement/debt-subject-to-limit. Accessed September 8, 2021.
[iii] See, for example, 31 U.S. Code § 3102
[iv] Based on figures from “Table 7.3—Statutory Limits on Federal Debt: 1940–Current.” White House, Office of Management and Budget, Historical Tables. https://www.whitehouse.gov/omb/historical-tables/. Accessed September 1, 2021.
[v] U.S. Library of Congress, Congressional Research Service, The Debt Limit Since 2011, by D. Andrew Austin, R43389 (2021), i.
[vi] Senator Obama, speaking on H.J. Res. 47, 109th Congress, 2nd session, Congressional Record 152 (March 16, 2006): S2236.
[vii] An Act To Authorize an Additional Issue of Bonds to Meet Expenditures for the National Security and Defense, and, for the Purpose of Assisting in the Prosecution of the War, to Extend Additional Credit to Foreign Governments, and for Other Purposes, Public Law 43, U.S. Statutes at Large (1917): 290-291.
[viii] Calculations based on data from Congress.gov and U.S. Library of Congress, Congressional Research Service, The Debt Limit Since 2011, by D. Andrew Austin, R43389 (2021), i.
[ix] Letter from Treasury Secretary Janet Yellen to House Speaker Nancy Pelosi, September 8, 2021. https://home.treasury.gov/system/files/136/Debt-Limit-Letter-to-Congress_20210908_FINAL-Pelosi.pdf. Accessed September 8, 2021.