What Is the Debt Ceiling and Why Is It Getting So Much Attention?

debt ceiling

(Getty Images/Katie Couric Media)

A tool that was created for fiscal responsibility has quickly turned into a political weapon.

There’s been a lot of talk recently about the debt ceiling as Democratic and Republican lawmakers remain at odds over whose responsibility it is to raise the country’s borrowing cap. 

While Democratic lawmakers insist on bipartisan support, Republicans have said that Democrats are on their own and have blocked multiple attempts to address the debt ceiling in recent days. Despite this bitter partisan fight, lawmakers were able to narrowly avert a government shutdown just hours before the deadline on Sept. 30.

All of this back and forth raises some questions of what the debt limit really is, how we got here, and what will happen if the U.S. is left unable to pay its debts, so we’re breaking it down for you. 

First, what is the debt ceiling?

Also known as the debt limit, it’s the maximum amount of money the U.S. Treasury is allowed to borrow each month to pay its debts. These funds are then used to pay for its financial obligations, like Social Security payments, Medicare reimbursements, and other programs like tax refunds. But in order to continue to borrow money — which is necessary because the government spends more money than it takes — the Treasury must first get congressional approval.

While this move often sparks talks to cut government spending, lifting the debt limit shouldn’t be confused with a budget resolution; the limit doesn’t determine the amount of government spending, but rather allows the U.S. to pay for existing obligations.

Where did the debt limit come from?

The debt limit was first instituted by Congress in 1917 to provide more flexibility to finance the United States’ involvement in World War I at the time. Since then, lawmakers have raised the debt ceiling more than a dozen times in the past 20 years.

But it has steadily become a routine — and often fraught — congressional responsibility, and this tool that was initially created to make it easier for the government to function has instead become a source of dysfunction. 

Mark Hamrick, who is a senior economic analyst at Bankrate.com, says the debt limit has become “an unnecessary, high-risk game of financial chicken” that puts the “nation’s economy and financial system at risk.” That’s why rather than raise it, lawmakers often vote to suspend the debt ceiling for a period of time to allow the Treasury Department to borrow what it needs, which is what happened in 2017 under the Trump administration. When that suspension expired in August 2021, the amount borrowed during that time — roughly $6.5 trillion — was added to the previous debt limit of more than $22 trillion, bringing the limit to $28.5 trillion.

What happens if Congress doesn’t raise the debt ceiling?

Since that suspension expired, the Treasury has been moving money around for a few weeks to cover the shortfall in cash flow, but officials say these “extraordinary measures” can only go so far. The Bipartisan Policy Center now estimates that Treasury will really run out of cash sometime between Oct. 15 and Nov. 4. 

But BPC’s Economic Policy Director Shai Akabas added that this is just an estimate and that it’s even difficult for the Treasury to project this so-called “X-date” because of the hundreds of millions of payments that the government is distributing as part of pandemic relief aid. “We’re trying to roughly estimate when those are going to force Treasury to run out of money, but that could happen unexpectedly,” Akabas told us. 

If the government can’t pay its bills, millions would be affected: Social Security payments wouldn’t go out, U.S. troops and federal employees wouldn’t be paid, and Americans on food stamps would stop seeing benefits. This could also affect payments that many families have become dependent on during the pandemic, such as child care tax credit.

What happens if the U.S. lapses into a default?

The general consensus among economists and Treasury officials is that this would be not only unprecedented but also lead to economic catastrophe. In an op-ed for the Wall Street Journal, Treasury Secretary Janet Yellen warned that a default “could trigger a spike in interest rates, a steep drop in stock prices and other financial turmoil.” What’s more is that it could also lead to the loss of nearly 6 million jobs and increase the nation’s unemployment rate to almost 9 percent, according to an analysis by financial services firm Moody’s Analytics.

But even the threat of default can have financial consequences: the U.S. credit rating was downgraded in 2011 one level — from AAA to AA+ — for the first time by Standard & Poor’s after the Obama administration reached a deal with Republicans on the debt limit.  

Akabas says it could also have serious ramifications on our global standing as an economic leader. “We get a lot of advantage from everybody operating under our currency because that means it just increases demand for it,” he says. “So if people are calling into question whether that’s the best currency for the world to be using as its reserve because the U.S. is not trusted anymore as a global economic power, then that could really hurt us economically as well in ways that we can’t entirely predict.”

Where does government funding fit into this?

The rush to address the debt ceiling happens to coincide with another deadline to fund the government by Sept. 30. While both parties generally agree on the need to act quickly, Senate Republicans blocked a House-passed bill that would keep the government running through early December because of its inclusion to raise the debt ceiling. But Democrats later stripped the debt ceiling hike and passed a bill to keep the government open through Dec. 3. The new measure also includes relief for the Gulf Coast and other areas hit hard by hurricanes and provides more aid to help resettle Afghan refugees.

Yet, the debate over the debate ceiling remains unresolved and lawmakers are racing towards finding a solution before the government defaults on its debt on Oct. 18.