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What’s the Debt Ceiling, and Will the US Raise It?

WASHINGTON, DC - JANUARY 03: Members-elect of the 118th Congress leave the House Chamber after three ballots failed to elect a new Speaker of the House at the U.S. Capitol Building on January 03, 2023 in Washington, DC. House Minority Leader Kevin McCarthy (R-CA) failed to get enough support to be Speaker during more than five hours of voting. (Photo by Chip Somodevilla/Getty Images) Photographer: Chip Somodevilla/Getty Images (Photographer: Chip Somodevilla/Getty Images)

The very phrase “debt ceiling” sounds austere and restrictive, as if it’s a lid on government spending. In fact, this cap on US government borrowing affects only the ability to pay existing bills, not to approve more spending. But it has become an explosive political issue with the potential to roil financial markets, since a failure to raise the ceiling could eventually result in a first-ever default on some of the government’s obligations.

1. Why is there a debt ceiling?

Its creation, in 1917, made it easier to finance World War I by grouping bonds into different categories, easing the burden on Congress to approve each bond separately. With World War II looming in 1939, Congress created the first aggregate debt limit and gave the Treasury Department wide latitude on what bonds to issue. Raising the ceiling lets the government borrow to cover the gap between spending and taxes already approved by Congress. 

2. When did it become a political issue?

The limit was routinely raised without incident until 1953. That year, approval was held up in the Senate in an attempt to restrain President Dwight Eisenhower, who had requested an increase to enable construction of the national highway system. The limit has since been raised dozens of times, usually without a fight; both parties agreed to hikes under Republican President Donald Trump without a fuss, for instance. But the past quarter century has seen the debt ceiling increasingly become a partisan weapon.

3. What were the biggest fights?

Raising the debt ceiling was among the disputes that caused two shutdowns of the federal government in late 1995 and early 1996. Another fight occurred in 2011, rattling financial markets and prompting Standard & Poor’s to issue the first-ever downgrade of the US government’s credit rating. Consumer confidence plummeted as did poll ratings for Republicans in Congress and then-President Barack Obama, who agreed to more than $2 trillion in spending cuts over a decade to end the crisis. A second debt-ceiling faceoff between Obama and Republicans occurred in 2013 as part of a doomed GOP effort to undo the Affordable Care Act. It resulted in the cap being suspended for the first time.

4. What’s the issue now?

The US is bumping up against the current federal debt limit of nearly $31.4 trillion. Treasury Secretary Janet Yellen says special accounting maneuvers should avert a crisis until early June. These so-called extraordinary measures include withholding regularly scheduled contributions to a federal employee retirement fund and using that money to keep paying debts. Once those measures are exhausted, the options get more dire, potentially leading to a partial government shutdown and delays in government payments like Social Security checks. Defaulting on debt would “needlessly plunge the country into economic chaos, collapse, and catastrophe while giving our competitors like China an historic boost,” said a spokesman for President Joe Biden.

5. What would be so bad about a default?

Failure to pay holders of US government bonds would make them less desirable as investments, forcing the government to pay more in interest to sell them. That would have cascading effects. “Financial markets would lose faith in the United States, the dollar would weaken and stocks would fall,” the Council of Economic Advisers, part of the White House, wrote during a debt ceiling debate in 2021. “The US credit rating would almost certainly be downgraded, and interest rates would broadly rise for many consumer loans, making products like auto loans and mortgages more expensive for families who are subject to interest rate changes or taking out new loans.”

6. Who wants to raise the debt ceiling?

Leaders of both major political parties acknowledge that the debt limit must be raised, because the gap between government spending and revenue is so large. But many Republicans, who took control of the House of Representatives on Jan. 3, want to pair a debt limit hike with spending cuts, including potentially to Social Security, Medicare and Medicaid. “I would like to sit down with all the leaders and especially the president and start having discussions,” said House Speaker Kevin McCarthy, a Republican. Senator Joe Manchin of West Virginia, a centrist Democrat, says a possible compromise could involve pairing an increase in the debt ceiling with creation of special commissions to explore reducing overall US debt and shoring up the the Social Security and Medicare trust funds. But the Biden administration has said raising the debt ceiling is non-negotiable and shouldn’t be conditioned on any other action. Republicans blame high inflation on spending during Biden’s first two years in office.

7. Does there have to be a debt ceiling?

Some budget experts and commentators want to abolish the debt ceiling, arguing that the periodic congressional battles over it increases economic uncertainty. Supporters of the limit say using it to bargain for spending cuts serves the public interest at a time of historically high debt levels. The Obama administration considered but rejected untested ways to circumvent the debt limit, including minting platinum coins and placing them in the Federal Reserve or declaring the debt limit a violation of the 14th Amendment prohibition on questioning federal debt.

--With assistance from Erik Wasson.

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