Debt Ceiling

Updated on January 25, 2024
Article byJyotsna Suthar
Reviewed byDheeraj Vaidya, CFA, FRM

Debt Ceiling Definition

A debt ceiling, or debt limit, is like a rooftop that allows the Federal government to borrow a certain amount of debt by issuing bonds. It denotes the maximum level of national debt the government can have at a time without getting approval from Congress.

What is Debt Ceiling?

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The debt limit acts like a brim on the surface of borrowing. It serves as an additional source of revenue for the government. There are not many procedures or permission needed for the issuance. Besides, it helps to keep a check on the country’s finances.

Key Takeaways

  • The debt ceiling, or the debt limit, is the maximum limit to which the U.S. government can raise capital through bonds without approval. If it touches the roof, they cannot borrow more.
  • Congress first authorized the debt limit to the Federal government in 1917. The maximum debt limit was $13.5 billion, including long- and short-term bonds.
  • The current debt limit approved by Congress is $31.43 trillion, with an increase of 1200% compared to 1919.
  • The debt ceiling also tends to have certain disadvantages and has caused certain government shutdowns.

How Does The Debt Ceiling Work?

A debt ceiling refers to a maximum limit imposed on the government’s borrowing from the public. There is no Congress approval needed for issuing these bonds. The money generally acts as a side income for the federal government. However, the government cannot borrow anymore if it crosses or touches the ceiling.

The debt ceiling history and concept date back to the mid-20th century during the First World War in the United States. In the initial years of the U.S. Republic, Congress used to issue and authorize bonds. For example, during the American-Spanish war in 1898, the Treasury issued long and short-term debt bonds. However, the situation changed after the first world war. Congress found it difficult to manage the legislation. Thus, to make things seem easy, they kept a bond limit of $5 billion in the First Liberty Loan Act of 1917.

Congress shortly passed another law after the Second Liberty Bond Act of 1917. They started raising the debt ceiling to $9.5 billion in Treasury bonds. Likewise, one-year certificates have a limit of $4 billion. Consequently, the Federal government found it easy to issue bonds without any permission from Congress.

With a debt ceiling, the U.S. government is free to borrow money. Although it seems similar to the credit limit, there are key differences. While the creditor or lender decides the credit limit, the borrower can decide the limit in this case. Additionally, the government can make decisions on raising the debt ceiling. However, there were situations where the debt limit caused severe government shutdowns.

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Graph

The graph of the debt ceiling has been on the rise since 1917. Congress raised the limit from $9 billion to $31 trillion. The federal government must request congress to raise the limit before the debt ceiling deadline. For example, in 2021, the ceiling limit allocated to the U.S. government was December 15. However, there are instances where they refuse to raise the limit. Let us look at the timeline for increasing the debt limit of the United States:

YearDebt limit ($ billions/trillion)
1919$25
1929$43
1941$65
1945$300
1946$275
1954$281.00
1962$308.00
1969$377.00
1975$595.00
1980$925.00
1989$1820.00
1990$4,140.00
1997$5,600.00
2004$8,100.00
2008$11,300.00
2010$14,300.00
2013$16,700.00
2017$19,800.00
2019$22,030.00
2021$31,400.00

U.S. Debt Ceiling Crisis

The U.S. debt ceiling crisis has been a widespread concern among all the countries in the world. Since 1917, more than 98 revisions have raised and reduced the debt limit. However, in 1995, the Republican members of Congress refused to accept an increase to fulfill the government spending cuts. As a result, the U.S. government refused to accept this, eventually leading to a government shutdown. However, by the mid-21st century, the United States was about to default. Finally, in 2011, the government had nearly reached the debt limit under the Presidency of Barack Obama. As a result, the U.S. Treasury rating dropped from a triple-A rating to a poor rating.

During post-World War II, Congress reduced the debt limit to $275 billion. Since then, the ceiling has been rising for many decades. Thus, in 2012, 2013, and 2014, the then-president raised the limit from $1.6 to $1.8 trillion. Congress again raised the bar under the debt ceiling deadline but refused to extend it further. Again, in 2019, the U.S. administration requested to increase the ceiling but was rejected. Currently, in 2022, the debt limit is $31.43 trillion.

Pros & Cons

The debt limit has certain pros and cons involved. It proves to be a greater advantage to the U.S. government. They are free to issue as many bonds to the public without approval from Congress and use it as a revenue source. However, the debt ceiling can be a disadvantage to others.

Although they are free to issue bonds, they cannot par against a certain limit. If it does so, the economy and the respective government might collapse. As a result, there can be disruption and chaos among the citizens. Also, repayment of the same might get difficult with time.

Pros Cons 
Provides easy approval for national financing Decreases the credit rating of the country 
Keeps a check on the debt limitIncreases cost of debt
Serves as immediate funding to government expendituresIt creates a huge burden on the government
Disrupts the functioning of the economy

Frequently Asked Questions (FAQs)

1. Does the debt ceiling affect social security?

Yes, it does impact social security severely. For example, if a country fails to pay the debt amount or claims to default, the payment checks for social security workers will get delayed. According to figures, more than 65 million people are part of this security program.

2. Can Congress raise the national debt ceiling?

Yes, Congress has the right to increase the pre-decided debt limit. For example, if the limit set by Congress is low or near default, the government can request to raise the limit to avoid default payment.

3. How many times has the debt ceiling been raised?

There have been 78 separate increases in the debt limit since 1960. In addition, 49 times under Republican Presidents and almost 29 times under democratic ones.

4. Who owns the debt ceiling?

Most of the debt limit is owned by the Federal (U.S.) government as they are the borrowers of this debt.

This article has been a guide to Debt Ceiling and its meaning. We explain it with its history, the US debt ceiling crisis, the graph, and the pros & cons. You may also find some useful finance articles here –

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