The United States debt limit or debt ceiling is an amount, fixed by legislation, of the national debt that can be imposed by the Treasury.  Since the different expenditures of the government are observed and authorized by different pieces of legislation, the debt ceiling does not play any role in restricting annual deficits.  And as a result of this, it only restrains the Treasury from paying the debt that has already been accumulated.  In 1917, the United States imposed some legislative restrictions on the debt.  Gradually, some political disputes arose over the legislation that led to the enactment of legislation requiring Congressional approval to raise the debt ceiling.  And although the debt ceiling is reached, the Treasury can still take extraordinary measures to avoid default on debts.  This allows Congress and the President even more time to negotiate a debt ceiling increase.

 

However, the United States has never met the default point, the stage where the Treasury can’t pay its obligations.  If this kind of a situation were to occur, it is unclear as to whether the Treasury would be able to avoid defaults by prioritizing its debt obligations.  But, at the same time, it would likely have to default on at least some of its non-debt obligations as well.  In fact, a default could trigger cascading economic problems like decline in output, stock market crash, recession, and severe financial and credit crises.   Unfortunately, those opposing the current Administration in Congress now routinely use their legislative authority to raise the national debt ceiling as leverage to gain concessions in other areas of contention with potentially serious repercussions.

 

The near-default resulting from the debt ceiling negotiations in 2011 resulted in a downgrade in the credit rating of the United States – producing an increase in the borrowing costs to the Federal government and a sharp drop in the stock market.  With the Budget Control Act of 2011, Congress raised the debt limit averting total economic chaos.   The debt ceiling was also raised without too much controversy at the end of 2012.  On February 4, 2013, President Obama signed into law the “No Budget, No Pay Act of 2013”, which suspended the U.S. debt ceiling through May 18, 2013.  Despite its passage and enactment, on March 1^st, the sequester, cutting 1.2 trillion dollars over the next decade, went into effect due to Congress’s failure to reach a deal to avoid it.  The Treasury adopted some exceptional measures to avoid minimize its impact on provision of necessary government services.

 

Before 1917, the United States had no debt ceiling.  At that time, Congress permitted the Treasury to issue certain specific debt issues for defined purposes and provided authorizations for some specific borrowing activities.  Occasionally, Congress also gave the Treasury discretion regarding the type of debt instrument to be issued.

 

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