Understanding the Debt Ceiling

Understanding the Debt Ceiling

Topic 1: What is the debt ceiling and when did it start?

What is the debt ceiling?

The debt ceiling is a limit on how much money the federal government is allowed to borrow. It’s essentially the country’s credit limit, and it’s set by Congress.

When the government reaches the limit (as they did on January 19th), the Treasury can’t borrow any more money to fund the government – they must make do with the taxes they collect and the cash they have on hand.

But Washington spends much more than it brings in, so the Treasury can’t make do for long. Treasury Secretary Janet Yellen recently told Congress that the government could start missing payments as early as June 1st.

This could be America’s first time defaulting on the debt. The consequences could be widespread and severe – more on that later.

When did the debt ceiling start?

Congress used to micromanage every new act of borrowing, telling the Treasury exactly when and how to borrow money for each individual project.

In 1917, to have more flexibility for World War I, Congress gave the Treasury more power to borrow up to a certain amount ($11.5 billion at the time). And so the debt ceiling was born.

The debt ceiling has been adjusted over 100 times since 1917. Today, the limit stands at $31.4 trillion.