Lately, almost every news story about the US has been connected with the debt ceiling. What is the debt ceiling, and why is it so important to raise it?
Since 1917, the United States has had a law setting a legal limit on the total amount of debt the government is allowed to hold. The debt ceiling, also known as the debt limit, is a legal limit set by the US Congress on the government debt the US Treasury can issue. It represents the maximum amount of money the federal government is allowed to borrow to meet its existing obligations and fund its operations. When the federal government spends more than it receives, the government has to borrow money to cover that annual deficit. And every year, the deficit increases the national debt.
Today's deficits are caused largely by predictable structural factors:
- The aging baby-boom generation;
- Rising healthcare costs;
- A tax system that does not bring in enough money to pay for what the government has promised its citizens.
The coronavirus crisis has accelerated the already unsustainable fiscal trajectory because of its devastating impact on the economy.
It should be noted that the debt ceiling is a legislative mechanism unique to the United States, and not all countries have such a public debt limit. The US government's debt has increased under every president since Herbert Hoover. In response, the debt ceiling was raised more than 100 times. It now stands at $31.4 trillion.
Why is this important?
The purpose of the debt ceiling is to ensure congressional control over the government's borrowing power and to provide regular opportunities for politicians to debate and decide the level of the national debt. It is intended to serve as a mechanism for fiscal discipline and oversight.
If debt reaches the allowed limit set by the debt ceiling, the Treasury cannot issue additional debt to meet its obligations. This situation could create a potential risk of default on existing obligations, with serious consequences for the economy and financial markets.
To avoid default, the Treasury usually takes measures to temporarily suspend or modify certain government spending and accounting procedures, known as "emergency measures," to free up additional borrowing capacity. However, these measures are temporary solutions, and if the debt ceiling is not raised or suspended, the government may eventually run out of money to pay all bills.