The United States debt ceiling is a limitation imposed by Congress on the amount of debt that the U.S. Federal government can have outstanding. One must understand that the debt limit or ceiling is not a forward-looking budgeting tool that indicates what policymakers think are ideal levels of spending and revenue. Instead, the debt ceiling largely reflects the revenue and spending decisions debated and enacted by prior Congresses and Administrations. As Kavan Choksi says, over the decades Congress has raised or suspended the debt ceiling repeatedly in order to accommodate new government spending.

    Kavan Choksi offers an overview of the United States debt ceiling

    The debt ceiling is the restriction on how much the federal government may borrow in order to pay its bills. Each year, the United States Congress agrees on a budget for government spending on discerning products and services. This includes the military, national parks and Social Security. Congress also sets taxes to pay for these expenses. The duty of managing the flow of money, which involves collecting taxes and distributing funds, falls on the United States Treasury. A deficit occurs when the tax revenue is lower than the government spending. As such a situation arises, the Treasury would have to make up the difference. To do so, the United States Treasury borrows money by issuing government securities, which tend to be purchased by other countries and institutions. The debt ceiling is the limit on the sum of money the treasury can borrow.

    Despite the debt ceiling, Congress may approve a budget with a deficit that is more than the debt ceiling. In order to do so, it has to vote to raise the ceiling in order to cover the relevant expenses. The first debt limit was established in 1917, when Congress passed the Second Liberty Bond Act.  Prior to that, the Congress had to approve each and every bond issuance. As the United States entered World War I and war bonds were needed to support military efforts, this system invariably became slow and complex. The first debt limit was established to provide autonomy to the United States Treasury over borrowing by allowing it to issue debt up to the ceiling without congressional approval. This made it much easier to finance mobilization efforts in World War I.

    As the United States got involved in more wars abroad over the years, it also started to accumulate more debt. The U.S. raised the debt limit every year to accommodate increased borrowing after entering World War II. By the war’s end in June 1946, the government reduced the debt limit to $275 billion as the immediate financial pressures of wartime spending decreased. During this period, the United States managed to achieve three consecutive years of budget surpluses, marking a fiscal shift as peacetime spending began. The debt ceiling stayed unchanged for eight years, which marked the longest duration without adjustment since the debt limit’s inception.

    As Kavan Choksi says, the debt ceiling enables the Treasury to act independently while remaining accountable to Congress. In case the debt ceiling is reached, the Treasury does have a few options. It may use existing cash, prematurely redeemed Treasury bonds, or halt contributions to government pension funds. To date, Congress has always avoided default by raising the debt ceiling.

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