Once every few years, we hear politicians and the media begin talk about the debt limit, also known as the debt ceiling. The conversation, which includes vague references to the disastrous economic consequences of surpassing the limit, slowly builds momentum and urgency until a deal to avoid crisis is struck, and talk of the debt limit recedes.
Amidst the chaos of what can seem like a regularly-scheduled financial crisis, it’s easy to lose track of what is actually being debated, which is the increase of a congressionally-defined cap on the amount of money that the federal government can borrow to pay its bills. Read on to learn what exactly the debt limit is, why approaching or breaching the limit could be risky, and how the 2023 debt limit negotiations fit in.
What Is the Debt Limit?
A core tenet of the separation of powers set up by the United State Constitution is that only Congress can authorize the borrowing of money by the federal government, typically through the issuance of bonds. Before 1917, Congress would specifically authorize borrowing when the federal government needed to. This process changed when unpredictable spending needs during World Wars I and II led to the creation (in 1917) and further establishment (in 1939) of a general limit on the national debt, which we now know as the debt limit.
In 1941, Congress passed an act raising that debt ceiling to $65 billion, meaning that Congress would need to act before the federal government’s debts reached that limit. Since 1941, Congress has passed more than 100 debt ceiling increases, oftentimes with little fanfare or controversy.
There are two basic approaches to “increasing the debt ceiling”:
- Congress can simply raise the amount of money that the federal government can borrow, or
- Congress can “suspend” the debt ceiling for a set period of time, granting the government the ability to borrow beyond the existing ceiling, and meet its financial obligations, through that period.
In both cases, a debt ceiling increase is only a temporary solution. To understand why this common procedure is so often at the center of Congress’ most heated battles, it is important to understand the impact of hitting the debt ceiling.
What Happens if the Debt Ceiling Is Breached?
Generally speaking, Congress directs the federal government’s income via taxes, and its expenses, like social security, payroll for federal employees, and interest on existing debt, through appropriations bills. Because the expenses almost always exceed the income, the Treasury Department must take on debt to pay the government’s bills via bond sales. If the debt limit is reached, and the Treasury is no longer able to raise funds via debt, there will not be enough money for Congress to pay for all of its expenses.
The United States technically hit its debt ceiling in January 2023, but Treasury Department “extraordinary measures” allowed the government to keep paying its expenses for over six months. The date at which even those extraordinary measures would fail to allow the federal government to pay all of its bills is known as the “x-date”, and it is difficult for even financial experts to precisely predict.
Congressional leaders and the White House were able to pass a deal before the x-date in 2023, but what would happen if that x-date was reached? Economists have debated this question for decades, and it is impossible to predict exactly what would happen. But, in a general sense, the federal government would need to decide which bills to pay, and which payments to miss.
It is commonly thought that, after reaching the x-date, the government would first delay federal employee paychecks and/or payments through federal programs like Medicare and Social Security before failing to make payments on existing debt, which would cause a default. Experts agree that a default would have disastrous impacts on the stock market, the national and global economy, and any American who relies on programs like SNAP or veterans benefits to get by.
Why Do We Constantly Find Ourselves Nearing the Debt Ceiling?
Given the turmoil that default could cause, it can be hard to understand why Congressional leaders struggle to agree on increasing the debt ceiling. In fact, strong arguments could be made for eliminating the debt ceiling altogether — no other country has a similarly restrictive debt ceiling; Denmark is the only other country with an absolute debt limit, but it is kept well above current borrowing to avoid ever approaching the limit.
The truth is that the debt ceiling is so often at the center of massive political debates because of the turmoil that a default would cause. Missing social security payments, weakening the United States’ borrowing reputation, and the other impacts of a default end up being an invaluable bargaining chip for one party to use to win policy concessions from the other party. In a strictly political sense, debt limit negotiations require the support of both chambers of Congress and the White House, and anybody with enough power can effectively tie their support of increasing the debt limit to their policy priorities.
2023 Debt Ceiling Negotiations
Once Republicans took control of the House of Representatives following the 2022 midterm elections, a looming fight over the debt ceiling, technically hit in January 2023 but with an estimated x-date in early June, began to take shape. President Biden first called for a “clean increase”, meaning an increase that is unattached to any other policy changes, through the 2024 elections. The President’s logic makes sense, as a clean increase would prevent him from having to win GOP support of policy changes. Further, the extension through 2024 would prevent the debt ceiling from becoming a liability for the President during campaign season.
House Republicans, led by newly appointed Speaker Kevin McCarthy, were never going to let this happen. Without Republican control of the Senate or White House, the debt ceiling negotiations became one of McCarthy’s first and only opportunities to force concessions from Democrats. Republican demands mostly centered on federal government spending, which they view as out-of-control. Republicans proposed non-defense spending caps that would have drastically limited the growth of federal spending for the next decade and more aggressive work requirements for government programs like SNAP and Medicaid.
In the end, the White House and House Republican leadership were able to get their respective parties to pass H.R. 3746 to suspend the debt limit through the 2024 elections, cap non-defense spending in 2024 and 2025, and expand work requirements for those receiving food stamps to older individuals. Other policy changes in the bill will expedite approval of a natural gas pipeline in West Virginia (a win for their delegation), end the pause on student loan payments beginning in September (a Republican ask that aligns with the President’s existing plans), and cut IRS spending created by the Inflation Reduction Act (a Republican win).
Once again, Congressional leadership were able to avoid default at the last minute, but leaders are clearly getting more comfortable with approaching the debt limit, and the 2024 election will determine exactly what the next fight looks like.
