US & World Economies US Economy Fiscal Policy US Debt Ceiling and Its Current Status What Happens When the National Debt Exceeds the Ceiling? By Kimberly Amadeo Kimberly Amadeo Kimberly Amadeo is an expert on U.S. and world economies and investing, with over 20 years of experience in economic analysis and business strategy. She is the President of the economic website World Money Watch. As a writer for The Balance, Kimberly provides insight on the state of the present-day economy, as well as past events that have had a lasting impact. learn about our editorial policies Updated on June 21, 2022 Reviewed by Thomas J. Brock Reviewed by Thomas J. Brock Thomas J. Brock is a CFA and CPA with more than 20 years of experience in various areas including investing, insurance portfolio management, finance and accounting, personal investment and financial planning advice, and development of educational materials about life insurance and annuities. learn about our financial review board Fact checked by Emily Ernsberger Fact checked by Emily Ernsberger Twitter Emily Ernsberger is a fact-checker and award-winning former newspaper reporter with experience covering local government and court cases. She also served as an editor for a weekly print publication. Her stint as a legal assistant at a law firm equipped her to track down legal, policy and financial information. learn about our editorial policies In This Article View All In This Article History of the National Debt Ceiling Why the Debt Ceiling Matters Past Debt Ceiling Crises What Happens When the Ceiling Isn't Raised? What Happens When It Is Raised? Frequently Asked Questions (FAQs) Photo: The Balance / Bailey Mariner The debt ceiling is the limit that Congress imposes on how much national debt the federal government can carry at any given time. The amount is set by law and has been increased over the years to finance the government’s operations. When the ceiling is reached, the U.S. Treasury Department cannot issue any more Treasury bills, bonds, or notes. It can only pay bills as it receives tax revenues. If the revenue isn't enough, the Treasury Secretary then must choose between paying federal employee salaries, Social Security benefits, or the interest on the national debt. Key Takeaways The debt ceiling is the limit that Congress imposes on how much national debt the federal government can carry at any given time.Congress must raise the debt ceiling in order to prevent the U.S. from defaulting on its debt.Failing to raise the debt ceiling can cause several things, including an increase in interest rates, a decline in the dollar's value in the long term, and a general disruption to financial markets.While raising the debt ceiling is generally considered a non-issue, as it occurs often, continuing to raise the debt ceiling puts the U.S. further into debt. Congress already knows how much it will add to the debt when it approves each year's budget deficit. When it refuses to increase the debt limit, it's saying it wants to spend but not pay its bills. That's like your credit card company allowing you to spend above its limit and then refusing to pay the stores for your purchases. Congress imposes the debt ceiling on the statutory debt limit, which is the outstanding debt in U.S. Treasury notes after adjustments. The adjustments include unamortized discounts, old debt, and guaranteed debt. It also includes debt held by the Federal Financing Bank. The statutory debt limit is a little less than the total outstanding U.S. debt recorded by the national debt clock. It's also important to note that there are two types of U.S. debt. The first is what the government owes to itself, most of which includes the Social Security Trust Fund and federal employee retirement funds—this is known as intragovernmental debt. The debt that's owed to everyone else is the public debt, which covers the majority of all debts in the U.S. Note Each time Congress passes a budget that exceeds the debt limit, the debt ceiling is automatically increased. However, the Senate or the president could still refuse to raise the debt ceiling. History of the National Debt Ceiling Congress created the debt ceiling in the Second Liberty Bond Act of 1917. Initially, it allowed the Treasury Department to issue Liberty bonds so the U.S. could finance its World War I military expenses. Generally, elected officials have a lot of pressure to increase the annual U.S. budget deficit, yet increases in the budget push the national debt higher and higher. There is not much incentive for politicians to curb government spending. They generally may get reelected for creating programs that benefit their constituency and their donors. They also may be more likely to stay in office if they cut taxes. Deficit spending does, in general, create economic growth. Why the Debt Ceiling Matters Congress must raise the debt ceiling so the U.S. doesn't default on its debt, and this happens often. Between 1960 and September 2021, Congress acted 78 separate times to permanently raise, temporarily extend, or revise the debt limit, according to the U.S. Department of the Treasury. If you look at the debt ceiling history, you'll see that all parties and all members of Congress generally know when it is necessary. Note The debt ceiling has been altered almost twice as much when there is a Republican president in power versus a Democratic president. The debt ceiling really only has a strong impact when the president and Congress can't agree on fiscal policy, which has occurred in the past. The non-majority in Congress has historically used it as a way to get attention, as they might have felt slighted by the budget process. A debt ceiling crisis could come from this. Past Debt Ceiling Crises On July 31, 2021, the debt ceiling suspension that was put in place by the Bipartisan Budget Act of 2019 expired. This meant that the debt ceiling was reached once again. The national debt on Aug. 2, 2021, was $28.4 trillion. In October, Treasury Secretary Janet Yellen released a statement urging Congress to raise or suspend the debt ceiling as a way to prevent default. Just days later, Senate Democratic Majority Leader Chuck Schumer said that an agreement had been reached to extend the debt ceiling in early December 2021. While not a complete debt ceiling crisis, the national debt had reached new highs in 2021, drawing attention and concern from many. On Dec. 14, 2021, the debt ceiling was raised by $2.5 trillion, with a new limit of around $31.4 trillion. This increase constituted the largest dollar amount increase of the national debt. While the debt ceiling is raised pretty frequently, the process of raising it can often lead to disagreement among party leaders, and a possible government shutdown. This happened in 2013 and again in 2018. In January 2013, Congress threatened not to raise the debt ceiling. It wanted the federal government to cut spending in the fiscal year 2013 budget. However, better-than-expected revenues meant the debt ceiling debate was postponed until that fall. On Sept. 25, 2013, the Treasury Secretary warned that the nation would reach the debt ceiling on Oct. 17. Many Republicans said they would only raise the ceiling if funding for Obamacare was taken out of the fiscal year 2014 budget. Then, on the first day of fiscal year 2014—Oct. 1, 2013—the government shut down because Congress hadn't approved the funding bill. The Senate wouldn't approve a bill that defunded Obamacare, and the House wouldn't approve a bill that funded it. Note The Obama administration reported that the 2013 government shutdown cost 120,000 jobs and slowed economic growth by as much as 0.6%. On Oct. 17, 2013, Congress agreed to a deal that would let the Treasury issue debt until Feb. 7, 2014. Government leaders are often met with the choice to raise the debt ceiling, and the effects differ depending on how quickly they come to a decision. For example, the government shutdown in 2018-2019 was the longest ever, lasting 35 days, and furloughed about 380,000 federal employees, with another 420,000 reporting to work without pay. It was estimated to have reduced the gross domestic product (GDP) by about $11 billion. What Happens When the Debt Ceiling Isn't Raised? As the debt approaches the ceiling, the Treasury can stop issuing notes and borrow from its retirement funds. Once the debt ceiling is reached, Treasury cannot auction new notes. Instead, it must rely on incoming revenue to pay ongoing federal government expenses. That happened in 1996 when the Treasury announced it could not send out Social Security checks before Congress eventually intervened. Competing federal regulations make it unclear how Treasury should decide which bills to pay and which to delay. Note When the U.S. is paying back debts, foreign owners could be concerned that they may not get paid. For reference, the U.S. debt to Japan is the largest, followed by debt to China. If the Treasury did default on its interest payments, a few things would happen first: The federal government could no longer make its monthly payments.Federal employees would be furloughed and pension payments wouldn't go out. All those receiving Social Security, Medicare, and Medicaid payments might not receive their funds.Federal buildings and services would close. Second, the yields of Treasury notes sold on the secondary market would rise, which would inevitably create higher interest rates. This would increase the cost of doing business and buying a home. It would also slow down economic growth. Third, owners of U.S. Treasurys would likely dump their holdings, causing the dollar to plummet. The dollar’s drastic decline could eliminate its status as the world's reserve currency. Over time, the standard of living in the U.S. would decline. In this situation, the nation would find itself unable to repay its debt. Note In September 2021, Moody Analytics released a report that stated that, if the U.S. defaulted on its debt, it would be "cataclysmic ... the downturn would be comparable to that suffered during the financial crisis [of 2008]." What Happens When the Debt Ceiling Is Raised? Continuing to raise the debt ceiling puts the U.S. further into debt. Over the years, the debt ceiling has become more like a speed limit sign that is never enforced. In the short term, there are positive consequences to raising the debt ceiling. It allows the U.S. to pay its bills, and consequently, it helps the nation avoid a total debt default. The long-term consequences, however, are severe. The paper-thin debt ceiling is apparently the only restraint on out-of-control government spending. A 2017 survey found that 57% of people in the U.S. said Congress should not raise the debt ceiling. Only 20% said it should be raised. Generally, the debt ceiling is good in that it creates a crisis that focuses national attention on the debt. Raising it is a necessary consequence of management by crisis. The debt ceiling and government spending can also become a concern if the debt-to-gross domestic product (GDP) ratio gets too high. According to the International Monetary Fund (IMF), some scholars feel that the tipping point for the debt-to-GDP ratio is around 77% for developed countries. When the debt-to-GDP ratio gets too high, debt owners become concerned that a country can't generate enough revenue to pay the debt back. Frequently Asked Questions (FAQs) When does the debt ceiling need to be raised again? The government raised the debt ceiling to nearly $31.4 trillion in 2021. That debt limit is expected to cover federal borrowing until early 2023. At that point, the ceiling will likely need to be raised or otherwise altered. What does it mean for the debt ceiling to be suspended? When federal borrowing reaches the debt ceiling, the two most common solutions are to raise the debt ceiling or suspend it. Raising the debt ceiling sets a new borrowing cap at a specific dollar amount above the current cap. Suspending the debt ceiling temporarily removes the cap altogether. For example, in 2019, the government suspended the debt ceiling and eliminated all caps on borrowing until August 1, 2021. Updated by Hilarey Gould Hilarey Gould Twitter Hilarey Gould has spent 10+ years in the digital media space, where she's developed a passion for helping people understand economics, saving, investing, credit card perks, mortgage rates, and more. Hilarey is the editorial director for The Balance and has held full-time and freelance roles at a variety of financial media companies including realtor.com, Bankrate, and SmartAsset. She has a master's in journalism from the University of Missouri, and a bachelor's in journalism and professional writing from The College of New Jersey (TCNJ). learn about our editorial policies Was this page helpful? Thanks for your feedback! Tell us why! Other Submit Sources The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy. Congressional Budget Office. "Federal Debt and the Statutory Limit, September 2021." Department of the Treasury. “Debt to the Penny.” Congressional Research Service. "Debt Limit Legislation: The House 'Gephardt Rule',” Pages 1 and 2. Congressional Research Service. "The Debt Limit: History and Recent Increases," Page 3. U.S. Department of the Treasury. "Debt Limit." U.S. Department of the Treasury. "Remarks by Secretary of the Treasury Janet L. Yellen to CEOs and Business Leaders at the White House on Debt Limit." YouTube. “Schumer Says Agreement Reached on Debt Ceiling.” Congress.gov. "S.J.Res.33 - A Joint Resolution Joint Resolution Relating to Increasing the Debt Limit." Congressional Budget Office. "Federal Debt and the Statutory Limit, September 2013." Obama White House. "Impacts and Costs of the October 2013 Federal Government Shutdown," Page 2. Congressional Research Service. "The Debt Limit Since 2011." Committee for a Responsible Budget. "Q&A: Everything You Should Know About Government Shutdowns." U.S. Department of the Treasury. "Major Foreign Holders of Treasury Securities." Moody’s Analytics. “Playing a Dangerous Game With the Debt Limit,” Page 5. Morning Consult. "Majority of Americans Say Congress Shouldn’t Raise the Debt Ceiling." International Monetary Fund. "Threshold Effects of Sovereign Debt: Evidence from the Caribbean," Page 3. House Committee on the Budget. "The Debt Ceiling: An Explainer." 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