The meaning of the debt ceiling

By Patrick Hoff

MCT
MCT

President Obama signed legislation on Saturday that raised the country’s borrowing limit, or “debt ceiling,” until March 2015. Though the debt ceiling has been in and out of the news for years, it can still be a confusing concept for Americans to understand, especially since it has always been tied to other legislation for the past three years. Here’s a breakdown of what it all means.

What is the debt ceiling?

The debt ceiling, or debt limit, is the amount of money that the U.S. government is authorized to borrow in order to pay off its existing obligations, including Social Security, Medicare benefits, military salaries, interest on the national debt, tax refunds and other responsibilities. The debt limit does not authorize the government to spend any more money – it merely allows the government to pay for existing obligations that the president and Congress have already approved.

Imagine that the government has a credit card that they have charged many purchases to. Raising the debt limit is like asking the credit card company to raise the credit limit so that purchases that have already been made can be paid for.

Failure to raise the debt limit is worse than a government shutdown because if the debt limit is not raised, the United States defaults on its loans, causing strife for American families who rely on Medicare and Social Security benefits and causing the nation’s financial credibility to be shaken on a global scale. Other countries may stop lending money to the United States, and economies around the world would be weakened because of the interconnectivity of the global economy.

The U.S. debt ceiling has existed since 1917.

How does the debt ceiling get raised?

In order to raise the debt limit, Congress must vote and the president must approve the bill. A potential problem with this system arises when Congress and the president have different agendas or a political party wants to use the debt limit as a bargaining chip. For the past three years, the Republican-controlled House of Representatives has tied the debt limit increase to another piece of legislature in an attempt to get Democrats to negotiate, a tactic that has led to a number of high-profile political debates and the downgrading of the U.S. credit rating.

In 1995, the debt ceiling was not raised, leading to a government shutdown.

The debt limit was raised at least 90 times in the 20th century and has been raised 15 times since 2001.

Does every country have a debt limit?

No – in fact, it’s unusual that the United States has a separate measure for borrowing money separate from the federal budget. Denmark is the only other democratic country to have such a system. In most countries, the amount that the government can spend is tied to how much money the country is allowed to borrow.

 

Why does the United States have a debt limit?

Short version: Congress created it to save time so that they would not have to approve every single loan or debt individually. Some argue that in today’s government it is outdated and should be tied to the federal budget, which it was for about 30 years.

Long version: Prior to 1917, the Congress had to individually approve each loan or allow the Treasury to issue certain debt instruments for specific purposes. During World War I, Congress passed the Debt Ceiling Law, which allowed the executive branch to issue bonds and take on other debt as long as it fell under a certain amount, called the debt ceiling. In the 1930s, Congress created the first limit on accumulated debt of any kind, meaning that all federal debt now had a limit on it.

Prior to the Budget Act of 1974, the debt limit played a crucial part in the federal budget, giving Congress an opportunity to hold hearings and debates on the budget. After the budget process was reformed, however, the debt limit lost some of its prowess. In 1979, the “Gephardt Rule” was passed, which raised the debt ceiling when a federal budget was passed. Congress repealed this rule in 1995.

Why is there a big political battle every time the debt ceiling is raised?

Historically, this has not been the case. It has only been recently that Congress and the president have gone to battle over the debt limit. Prior to the 1970s, it was merely a legal budgetary formality that the president and Congress underwent but after the passage of budget resolutions, it became a political tool that Congress would use against each other and the president.

The debt limit has been raised five times under President Obama and is now up to $17.2 trillion.

 

Patrick Hoff can be reached at [email protected]