Five Facts on the Debt Ceiling

Five Facts on the Debt Ceiling

The U.S. hit its $31.4 trillion debt ceiling on January 19, 2023, forcing the Treasury Department to take extraordinary measures to allow the federal government to continue paying its bills in full and on time. One hundred days into the new Congress, however, little progress has been made on any bipartisan deal to lift the debt ceiling to keep pace with the national debt. Should Congress fail to act within the next few months, a debt default could ensue. Here are Five Facts about the debt ceiling and the implications of a default.

1. The debt ceiling was created by a 1917 federal law meant to help fund World War I without creating too much debt.

The debt ceiling in the United States was created in 1917 as part of the Second Liberty Bond Act, which authorized the government to issue bonds to support U.S. involvement in World War I. However, some in Congress were concerned about the government being able to manage its finances and control its debt. To address this, the law also included provisions that established a ceiling on the amount of money the U.S. Department of the Treasury could borrow without the consent of Congress.

2. Congress has raised the debt ceiling 102 times since World War II.

As the U.S. debt has continued to grow, raising the debt ceiling has become a regular occurrence in Congress. While most resolutions to lift the debt ceiling are relatively nonpartisan, in 2011 the process was mired in partisan fighting between the Obama White House and the newly empowered Tea Party wing of the Republican Party, which controlled the House of Representatives.

3. The federal government is expected to default on its debt sometime in the late summer or early fall, according to most estimates.

The “X date” – the day the U.S. officially defaults on its debt – is something of a moving target. Although the government cannot borrow any more money at present, it is still able to spend tax revenue to pay its debts. Therefore, how much revenue the government collects in taxes this month will be a factor in how long the country can go before default. If the economy continues doing well and tax revenues are high, the government may have more money available to pay its bills. However, a cooling economy could decrease tax revenues and inch the X date closer than previously thought.

4. Past debt ceiling impasses have had a negative impact on the country.

If the U.S. were to default on its debt and can no longer pay its creditors, it would likely be devastating to markets and the economy at large. Investors and creditors around the world might view the U.S. government as a riskier bet, which could lead to higher interest rates, a decline in the value of the dollar, and a stock market downturn.

However, even coming close to a default can have negative consequences, as was the case after the 2011 debt ceiling fight where a default was avoided by mere hours. After the last-minute deal, Standard & Poor's, one of the major credit rating agencies, downgraded the U.S. government’s credit rating from AAA to AA+, weakening investor confidence, raising borrowing costs, and damaging America’s reputation abroad. Fitch’s Ratings warned in March that a similar downgrade could happen this time even without a default.

5. Some government spending has already been halted due to the debt ceiling crisis.

To stave off the X date for as long as possible, Treasury Secretary Yellen has taken extraordinary measures to suspend reinvestments in the Civil Service Retirement and Disability Fund and the Postal Service Retiree Health Benefits Fund.

Secretary Yellen has also suspended the reinvestment of a government securities fund of the Federal Employees Retirement System Thrift Savings Plan.

It is important to note that despite these pauses, no retirees will be affected, and the funds will be made whole once the impasse ends.