What Is the Debt Ceiling?
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The debt ceiling, or debt limit, is the total amount the U.S. government can borrow in order to meet its existing legal obligations.
All legal obligations are approved by Congress and include funding for things like Social Security, Medicare, military salaries, interest on the national debt and tax refunds.
When the U.S. comes close to hitting the debt ceiling and it isn’t raised, the government won’t be able to pay its bills, which could lead to a default. The U.S. government defaulting on its debt could spell disaster on a national and global scale. Every few years, Republicans and Democrats decide to wage a battle over the debt ceiling.
The debt ceiling, which was suspended in June 2023, will return front-and-center come January. Once the debt limit is reinstated at the current level of debt on Jan. 2, the Treasury must begin taking extraordinary measures so the government can continue to meet its budgetary obligations. And if Congress doesn’t make a decision on the debt ceiling, the U.S. could risk default.
The government almost ran out of money in 2023
Right now the U.S. faces a threat of government shutdown, but it’s different from the funding crisis that happened with the debt ceiling in 2023. In January 2023, the U.S. hit its $31.4 trillion debt ceiling and, after six months of tug-and-war, narrowly avoided a default that would have triggered a financial crisis.
Here’s how it went down:
The United States hit its $31.381 trillion debt ceiling, or limit, on Jan. 19, 2023. Once that debt limit was reached, the federal government became at risk of default.
The Treasury Department began to implement “extraordinary measures” shortly thereafter so the government could continue to meet its legal obligations — already approved by Congress — to fund things like Social Security, Medicare, tax refunds and military salaries. Those extraordinary measures included suspending payments on retirement and health care funds for government employees.
On May 1, 2023, the Treasury Department made further measures to fund the government until the X-date — June 1 — when it was projected to run out of money. Those measures included suspending the issuance of State and Local Government Series Treasury securities, which are issued to states and municipalities to help them comply with certain tax rules. These securities count against the debt limit.
After months of tense negotiations, President Joe Biden and then-House Speaker Kevin McCarthy reached an agreement: the “Fiscal Responsibility Act of 2023,” signed by Biden on June 3, 2023. The agreement suspended the debt limit until Jan. 1, 2025. Learn more about what was in the deal.
What happened after the debt ceiling deal was reached?
The close call was not without its consequences — the most immediate was on the U.S. credit rating. On Aug. 2, 2023, Fitch Ratings downgraded the U.S. long-term foreign currency issuer default rating (IDR) to “AA+” from “AAA.” The credit ratings agency specifically cited the last-minute agreement to avoid default as a factor in its decision along with multiple other macroeconomic factors.
The U.S. credit rating is an evaluation of the country’s ability to pay its debts. The credit rating is set by three major credit rating agencies: Fitch Ratings, S&P Global Ratings and Moody’s Investors Service. A downgrade in a credit rating may make borrowers less likely to lend to the federal government, which can increase costs for U.S. taxpayers.
The last time the nation’s credit was downgraded was in 2011 when S&P lowered the U.S.’s rating to AA+ from AAA. It was also as a result of the debt-ceiling negotiations at that time.
Here’s where the U.S. credit rating stands with the three credit major credit ratings agencies:
• Fitch: AA+
• S&P: AA+
• Moody’s: Aaa
What could have happened if the U.S. defaulted?
Defaulting would have been very bad at best and catastrophic at worst. Congress has taken action on the debt ceiling more than 20 times since 2002, but the U.S. has defaulted only once, and it was due to a technical glitch in 1979. But it has also come close before: In 2011, negotiations dragged on so long the S&P downgraded the U.S. credit rating, which contributed to volatility in the markets.
A default that lasts longer than a few days could have resulted in a financial crisis that reverberates around the world. It could have included a sell-off of U.S. debt; money market funds selling out; suspension of federal benefits; increased interest rates on lending products and mortgages; tanking stock markets; delayed tax refunds; and the gross domestic product, or GDP, plummeting. A default would have also increased higher interest rates, tightened credit requirements and accelerated the arrival of a recession.
How do you solve a problem like the debt ceiling?
The most recent threat of default won’t be the last. So how can an eleventh-hour deal be avoided in the future? The clearest route to avoid future defaults is if Congress agrees to raise the debt ceiling before the government hits its so-called X-date — the date on which the federal government would go into default. But other options have been raised.
It’s unclear whether the president would have the executive power to lift the debt ceiling without congressional approval. It also raises the question of the legality of such an action.
Other ideas that have been floated range from “sober finance” to “tin-hat silliness,” says William Gale, senior fellow in the economic studies program at the Brookings Institution, a nonprofit research organization focused on public policy. Those ideas include:
• Minting the trillion dollar coin. A once-fringe, now-mainstream strategy to bypass the debt limit by having the Treasury mint a trillion-dollar platinum coin and deposit it into the Federal Reserve. Gale says he has no idea whether the Fed would accept this option or the legality of it.
• The Treasury issues consol bonds to meet debt obligations. These bonds, also called perpetuity bonds, pay out interest and have no maturity date. The lack of a maturity date means these bonds wouldn’t count under the debt ceiling.
“The Treasury can say, 'Here's a piece of paper. If you give us a dollar, we'll give you whatever the Treasury interest rate is, forever.' So every year you get a payment,” Gale says. “But the thing never pays off. It’s not a 10-year Treasury or a 30-year Treasury. It's infinite, so it wouldn't count under the debt ceiling.”
• The Fed returns Treasury debt back to the Treasury. The majority of federal debt is made up of Treasury securities. At its peak in early 2022, the Fed held $6.25 trillion in federal debt. By the close of the year, it was around $5.9 trillion.
There are other potentially serious, potentially gimmicky options in addition to the ones above, but the most feasible option is always the simplest: Congress acts, and the president signs.
What’s the difference between the debt ceiling and the national debt?
The debt ceiling and the national debt aren’t the same, but they relate to one another. The debt ceiling is the total the government is allowed to borrow before it defaults. The national debt is the total amount of outstanding money that is currently borrowed by the federal government, plus interest. Refusing to vote to lift the debt ceiling would not bring down the national debt — it would mean the government cannot repay the debt it already has.
Here’s how the national debt works: When spending surpasses revenue in a fiscal year, the government runs a budget deficit. In order to pay the deficit, the federal government borrows money by selling what are known as “marketable securities,” such as Treasury bonds, bills, notes, floating rate notes and Treasury inflation-protected securities, or TIPS. The total debt includes both the amount borrowed plus the interest that it promises to those who lent money by purchasing those marketable securities.
