Definition of the legal debt ceiling

What is a legal debt limit?

The legal debt limit, often referred to as the debt ceiling, was the limit set by Congress on the amount of debt the U.S. government could assume. It also includes interest payments on existing debt. Once the government reaches the legal debt ceiling, it cannot take on any new obligations.

Understanding the legal debt limit

Under the US Constitution, Congress has the power to borrow money. Prior to 1939, this meant that Congress would pass legislation authorizing the Treasury to issue specific amounts of bonds to raise funds for purposes specified in the legislation.

However, outside of these specified amounts of earmarked borrowing, the Treasury was not permitted to borrow money on its own authority, and the U.S. government did not maintain a large revolving debt burden as a normal means. fund general current expenses, such as paying for utilities, government salaries, entitlements such as health insurance and tax refunds.

In 1939, Congress passed the Public Debt Act, which, with subsequent amendments, delegated the power of Congress to borrow money from the Treasury as long as the total consolidated federal debt remained below the debt limit statute fixed by law.This was a radical departure from previous policy, effectively transferring by statute the power enumerated in the Constitution to borrow from the legislative branch to the executive branch of government.

Special Considerations

Yet only the US Congress has the power to raise the legal debt ceiling, which it has done more or less regularly, but not without occasional challenge. Raising the statutory debt ceiling has occurred 78 times since 1960. Raising the threshold has taken several different forms, such as redefining the debt ceiling, allowing a temporary extension of the ceiling, and raising permanent from the ceiling. The debt ceiling has been raised 49 times under Republican presidents and 29 times under Democratic presidents.

Although some politicians known as deficit hawks, as well as many citizens, frown on raising the debt ceiling, Congress has regularly raised the ceiling to avoid defaulting on government payments already committed.

Opponents of fiscal discipline generally argue that refusing to raise the debt ceiling would lead to default by the Treasury and be catastrophic for the US economy. They claim that those who live on Social Security would not receive their monthly payments, that members of the military would not be paid, that large segments of the American economy would experience great upheaval, and that a national economic crisis without precedent would ensue.

This tension has led to several episodes where budget negotiations between fiscal conservatives and other government factions have failed, forcing so-called government shutdowns by delaying the Treasury’s ability to continually increase federal debt.During these episodes, government agencies are usually required to restrict certain spending or temporarily suspend certain operations.

This leads to what is known as the Washington Monument Syndrome: government agencies selectively reduce their most popular services in order to cause as much discomfort and outrage as possible among the public, in order to put pressure on legislators to take on more public debt.

The evolution of the debt ceiling

When Congress chooses to increase the debt ceiling, the Congressional Budget Office (CBO) calculates an “X date”.“Date X refers to the day the government will likely exhaust its debt extension and need to further extend the limit, assuming it has not increased its revenue and paid off its debts.

The government gets revenue through taxes, so raising taxes could be a way to increase revenue to pay off debts. Alternatively, the government may choose to cut spending, restricting the funds it spends on infrastructure, the military, etc. The money saved from these reductions can also help prevent the debt ceiling from being raised. While raising the debt ceiling in times of severe fiscal pressures tends to be a bipartisan action, theories about ways to avoid it tend to fall more heavily in the partisan direction.

The first legal debt limit set in the United States was $45 billion in 1939. However, Congress raised the ceiling every year for the duration of World War II. By 1946, the limit had reached $300 billion. Over the following decades, it continued to rise as federal government spending and deficits grew. In 2013, instead of raising the limit, Congress temporarily suspended it, allowing the Treasury to borrow the funds it needs to fund government spending.

Temporary suspensions of the debt ceiling have become the new norm in the federal budget process. In a 2019 budget agreement between Congress and the Trump administration, the debt limit was suspended for two years, allowing the Treasury to borrow without limit during that time and sets the debt limit in 2021 based on the actual debt at that time.

While the 2021 budget deal is due to expire on July 31, 2021, this could change due to the continued impact of COVID-19. This practice of temporary, but repeated and ongoing suspensions, effectively ended the debt limit as a constraint on federal borrowing (and spending) for the time being.