What Happens When the U.S. Hits Its Debt Ceiling?
- As the national debt has soared, the U.S. Treasury Department has had to borrow more money to pay for government spending. The legislative curb on this borrowing is known as the debt ceiling.
- When the Treasury Department spends the maximum amount authorized under the ceiling, Congress must vote to suspend or raise the limit on borrowing.
- Economists warn of dire consequences, including default, if Congress cannot reach an agreement on the ceiling.
Congress has authorized trillions of dollars in spending over the last decade, causing the United States’ debt to nearly triple since 2009. Over that period, the Treasury Department’s ability to borrow money to make payments on that debt has repeatedly run into a congressionally mandated limit on borrowing known as the debt ceiling.
Efforts to raise or abolish the ceiling have become a topic of heated debate among policymakers; some lawmakers who decry government debt have used negotiations on altering the limit to try to force spending cuts. The congressional brinkmanship over the issue has increasingly led to disruption, including government shutdowns, and the specter of default that has threatened to push the economy into crisis. With the issue again on the table in 2023 under President Joe Biden and a Republican-controlled House of Representatives, economists are warning of catastrophic consequences if the Treasury Department can no longer pay the nation’s debts.
What is the debt ceiling?
Created by Congress in 1917, the debt limit, or ceiling, sets the maximum amount of outstanding federal debt the U.S. government can incur. In January 2023, the total national debt and the debt ceiling both stood at $31.4 trillion. The U.S. government has run a deficit averaging nearly $1 trillion every year since 2001, meaning it spends that much more money than it receives in taxes and other revenue. To make up the difference, it has to borrow to continue to finance payments that Congress has already authorized.
Congressional action to raise the debt ceiling does not increase the nation’s financial commitments, as decisions to spend money are legislated separately. Any change to the debt ceiling requires majority approval by both chambers of Congress.
How often has it been raised?
Raising or suspending the debt ceiling becomes necessary when the government needs to borrow money to pay its debts. For much of the past century, raising the ceiling has been a relatively routine procedure for Congress. Whenever the Treasury Department could no longer pay the government’s bills, Congress has acted quickly [PDF] and sometimes unanimously to increase the limit on what it could borrow. Since 1960, Congress has increased the ceiling seventy-eight times, most recently in 2021. Forty-nine of these increases were implemented under Republican presidents, and twenty-nine were under Democratic presidents.
Congress can also choose to suspend the debt ceiling, or temporarily allow the Treasury to supersede the debt limit, rather than raise it by a specific amount. While this move was rare during the first ninety years of the ceiling’s existence, Congress has suspended the debt limit seven times since 2013.
A new chapter of debate over the debt ceiling began in 2011, when sparring over spending between President Barack Obama and congressional Republicans resulted in a protracted deadlock. Congress eventually reached a deal to raise the ceiling just two days before the date that the Treasury estimated it would run out of money. However, the brinkmanship triggered the most volatile week for U.S. stocks since the 2008 financial crisis, and the credit rating agency S&P Global downgraded the United States’ creditworthiness for the first and only time ever. The Government Accountability Office, which serves as the federal auditor, estimated that the delay in reaching a deal increased U.S. borrowing costs by $1.3 billion [PDF] that year alone. In May 2023, ratings agency Fitch put U.S. debt on negative watch, a step that typically precedes a downgrade.
With U.S. political polarization deepening over the last decade, votes to raise the debt ceiling have remained contentious, with congressional budget hawks increasingly demanding spending cuts in return for their support. When the debt ceiling was set to expire in 2013, debate over the limit forced the government into a shutdown, and in 2021, the issue again came down to the wire. As policymakers once more deliberate over the debt ceiling in 2023, President Biden and senior Republicans in the House of Representatives are negotiating an increase in exchange for reductions in federal spending.
“If you gave your child a credit card and they kept hitting the limit, you wouldn’t just keep increasing it. You would sit down with them to identify where they are overspending and where they can change their behavior,” House Majority Leader Kevin McCarthy wrote on Twitter. “It’s time for the federal government to do the same thing.”
As of May 2023, the negotiations center on Republican proposals to impose work requirements for some recipients of federal benefits, put lasting caps on federal spending, and loosen permitting rules for fossil fuel energy projects.
What would be the consequences if the United States breaches the debt ceiling?
The debate over the debt ceiling has caused economists such as CFR’s Roger Ferguson to consider the once unthinkable prospect of a U.S. default—that is, Washington declaring that it can no longer pay its debts. Some experts say that would herald chaos for the U.S. and global economies. Even short of default, hitting the debt ceiling would hamstring the government’s ability to finance its operations, including providing for the national defense or funding entitlements such as Medicare or Social Security.
Potential repercussions of reaching the ceiling include a downgrade by credit rating agencies, increased borrowing costs for businesses and homeowners alike, and a dropoff in consumer confidence that could shock the United States’ financial market and tip its economy—and the world’s—into immediate recession.
“I think it’s pretty safe to say that if we were to default, it makes the odds of a recession almost certain,” former Treasury Secretary Jacob Lew said at a CFR event in April 2023.
Goldman Sachs economists have estimated that a breach of the debt ceiling would immediately halt about one-tenth of U.S. economic activity. According to center-left think tank Third Way, a breach that leads to default could cause the loss of three million jobs, add $130,000 to the cost of an average thirty-year mortgage, and raise interest rates enough to increase the national debt by $850 billion. In addition, higher interest rates could divert future taxpayer money away from much-needed federal investments in such areas as infrastructure, education, and health care.
“Failure to meet the government’s obligations would cause irreparable harm to the U.S. economy, the livelihoods of all Americans and global financial stability,” Treasury Secretary and former Federal Reserve Chair Janet Yellen wrote to Congress [PDF] in January 2023.
Could breaching the U.S. debt ceiling bring down other markets?
Experts say a U.S. default could wreak havoc on global financial markets. The creditworthiness of U.S. treasury securities has long bolstered demand for U.S. dollars, contributing to their value and status as the world’s reserve currency. Any hit to confidence in the U.S. economy, whether from default or the uncertainty surrounding it, could cause investors to sell U.S. treasury bonds and potentially weaken the dollar.
Over half of the world’s foreign currency reserves are held in U.S. dollars, so a sudden decrease in the currency’s value could ripple through the market for treasuries as the value of these reserves drops. As heavily indebted low-income countries struggle to make interest payments on their sovereign debts, a weaker dollar could make debts denominated in other currencies relatively more expensive and threaten to tip some emerging economies into debt or political crises.
Many U.S. exporters could benefit from dollar depreciation because it would increase foreign demand for their goods by effectively making them cheaper. Yet, the same firms would also bear higher borrowing costs from rising interest rates. Dollar instability could also benefit aspiring great-power rivals such as China. Though Beijing has long sought to position its renminbi as a global reserve, the currency accounts for 3 percent of the world’s allocated foreign reserves.
“For a Congress that is obsessed with America’s standing vis-a-vis China, the notion that it would commit an own goal and hand China such an opportunity seems incomprehensible,” writes Marcus Noland, the executive vice president and director of studies at the Peterson Institute for International Economics, a nonpartisan think tank.
Does the government have any options if the ceiling is not raised?
If congressional negotiations over the debt ceiling are not resolved before the ceiling is reached, the Treasury can stave off a default for several months with a series of temporary actions it calls “extraordinary measures.” These include suspending payments to some government employee savings programs, underinvesting in certain government funds, and delaying auctions of securities.
While the Treasury has used these measures when previous negotiations stalled—including in 2011 and 2013—Congress has never failed to raise the ceiling before the measures have been depleted. If Congress does not act to raise the debt limit despite such emergency measures, federal spending would have to plummet or taxes would have to rise significantly (or a combination of the two). In 2023, the debt ceiling was reached without a deal on January 19; Treasury Secretary Yellen has warned that extraordinary measures could be exhausted by June 1. Experts have viewed both reducing federal spending and increasing tax revenue enough to cover the needed payments as processes that could take over a decade.
As that date neared without a deal to raise or suspend the limit, some experts proposed alternatives that would not require congressional approval. These include invoking the Fourteenth Amendment of the U.S. Constitution, which states that “the validity of the public debt of the United States… shall not be questioned,” to issue more debt; others include selling U.S. gold and minting a platinum coin worth $1 trillion. Biden has publicly called these measures untenable. The Treasury Department could also defer payments on military salaries or to Social Security and Medicare recipients. It has the option of prioritizing debt payments, although in March 2023, Yellen dismissed that idea as “default by another name.”
Despite the cushion of extraordinary measures, long impasses over the debt ceiling can be enough to shake investor confidence. In May 2023, interest rates on four-week U.S. Treasury bills, long considered the safest asset in the financial system, reached a record high.
Do other countries have similar policies?
Few countries maintain debt ceilings, and nowhere else do the limits regularly threaten serious economic disruption. Denmark has one, but it is so much higher than the country’s spending that it has not posed a problem. In 2021, Denmark’s central government debt was about 14 percent [PDF] of its ceiling. Australia introduced a debt limit in 2007 with the goal of legislatively mandating fiscal responsibility amid large budget deficits. The ceiling was raised several times before being repealed in 2013. Poland’s constitution caps spending at 60 percent of gross domestic product (GDP), but it does not limit borrowing.
Should the debt ceiling be revoked?
Some analysts contend that by requiring legislative consent, the debt limit affords Congress some oversight authority and engenders fiscal accountability. The original 1917 legislation was meant to give the Treasury some autonomy over borrowing by allowing it to issue debt up to the ceiling without congressional approval for each issuance; prior to 1917, Congress authorized the Treasury to borrow in smaller increments. But in recent years, opposition parties have often used debt limit negotiations as leverage to influence policies not related to the ceiling itself.
Some economists say that the debt ceiling still serves a useful purpose by creating a credible commitment to limit spending. They point out that previous debates over the debt ceiling led to concessions that curtailed spending. In 2023, many congressional Republicans have taken heed, tying debt ceiling negotiations to their concerns that growing budget deficits threaten the U.S. economy.
But many other economists and policymakers contend that the federal debt ceiling is anathema to sound fiscal policy, calling it unwise to inhibit the government’s ability to meet already legislated financial obligations. In 2013, 97 percent of U.S. economic experts convened by the University of Chicago agreed that the U.S. mechanism for raising the debt ceiling can lead to worse fiscal outcomes. Yellen falls into that camp, having argued that the debt ceiling is inherently harmful to the U.S. economy, because it functions primarily to restrict borrowing that finances previous commitments.
CFR’s Ferguson agrees. “Congress should eliminate the debt ceiling completely, or at least tie it to spending such that the debt limit increases automatically whenever a spending bill passes,” he writes. “It is time for the United States to leave behind this antiquated mechanism that brings the country to the precipice of default every few years.”
This Backgrounder explores the U.S. national debt dilemma.
The Government Accountability Office examines the economic consequences [PDF] of the 2011 debt ceiling showdown.
In this Washington Post article, Stephen B. Kaplan of George Washington University analyzes how breaching the debt ceiling could affect the prominence of the U.S. dollar
This Backgrounder looks at the role of the U.S. dollar in the global economy.
CFR’s Roger Ferguson argues that the debt ceiling should be abolished in this In Brief.
Will Merrow created the graphics for this Backgrounder.