Want to know what is Debt Ceiling? Keep reading!
Everyone, from individuals to governments, takes debt, and debt is not necessarily a bad thing unless you can afford to pay that debt back and actually get something in return for the debt you take and use it for something good.
Governments take out debt to provide for the citizens and increase the capacities of the government, but even governments have a limit on how much they can borrow.
The limit that the US government can borrow is called the debt ceiling, and they can’t go over that limit by issuing bonds.
This article will discuss the debt ceiling and how it works for the United States.
- The US government needs to act within the limit of the debt ceiling.
- The debt ceiling has changed 78 individual times since 1960.
- Decrease or increase in the limit of the debt ceiling is approved by Congress.
- The debt ceiling is mostly increased to prevent the United States from defaulting on its debts.
What Is Debt Ceiling?
The debt ceiling is the maximum amount of money the United States government can borrow by issuing new bonds to investors.
Ever since 1917, the United States government has had to act within the limit, they have regarding the debt they can have to protect the finances of the country.
This debt ceiling is increased to help the government further if the necessary departments, mostly Treasury Department, believe that it won’t hurt the economy.
However, the reason why this debt ceiling mostly increased was to prevent the United States from defaulting on its debts.
As the Treasure of Department states, the debt ceiling has changed 78 individual times since 1960.
Nevertheless, it is worth noting that it is not one person’s decision to increase, decrease, extend, or revise the debt ceiling as congress must approve the ceiling.
Read: What Is Debt Management?
Why Is There A Debt Ceiling?
The main reason for the debt ceiling is to limit the amount of money the government can borrow and spend without ruining the country’s finances and lowering the credit score.
With this, the government has a limit on how much they can borrow and make the government fiscally responsible.
It was first created after World War I to make sure that it would be easier to fix the economic downturn the country faced.
However, even though there is a debt ceiling, this limit has always been increased whenever the US government approaches the limit.
The congressional vote decides on the debt ceiling, and then the president of the United States approves it by signing it into law.
The process is rather easy, and it allows for the Treasury Department to issue bonds whenever they wish without further approval as long as they are within the debt limit.
Read: What Is Debt Financing?
Pros And Cons Of Debt Ceiling
- Useful in funding federal operations.
- Keeps the nation’s finances in check.
- Improves the government’s ability to fund obligations such as medicare benefits & social security.
- Because it can be raised easily, it can lead to fiscal irresponsibility.
- It increases debt and decreases the U.S. credit rating.
What Happens When The Debt Ceiling is Hit?
Once the government has hit the debt ceiling and has exhausted all the available measures, it is no longer allowed to borrow any more money and soon runs out of cash-in-hand.
At this point, the incoming receipts become insufficient to carry out daily activities.
This leads them to default on their obligations, such as social security payments, making payments towards military and veterans’ benefits, etc.
In such a situation, other more important obligations are prioritized, and the payments are made towards them first.
Why Does The U.S. Keep Hitting the Debt Ceiling?
How Can The Debt Ceiling Be Improved?
Here are a few measures using which the debt ceiling can be improved:
- Replacing debt limits according to the limits on future obligations.
- Making changes in the debt limit to achieve fiscal targets.
- Applying the debt limit on more meaningful and responsible debt measures.
- Debating about debt limit before congress makes spending decisions and not after the decisions are made.
To conclude, the debt ceiling has been within the United States law for over a century, and every president must obey the debt ceiling the congress votes in.
However, every time the United States government approached the debt limit; Congress voted to increase the limit.
This means that it is not an extremely strict ceiling, but legally, the Treasury Department must stay within those limits to issue bonds without any further approval.
This makes sure that the United States can repay its loans and not lower its credit ratings, making way for higher interest rates.
The debt ceiling has been raised how many times?
Since 1960, the U.S. debt ceiling has been raised, revised, or extended 78 times.
This happened 29 times under Democratic presidents and 49 times under Republican presidents.
Is there any limit to the national debt?
Yes, the national debt ceiling puts a limit on how much a nation can borrow money. As of October 2022, the national U.S. debt was $31 trillion.
Is the U.S. the only country that has a debt ceiling?
Only the U.S. and Denmark have debt ceilings set to an absolute amount rather than a percentage of GDP.
Amit Gupta is the founder of National Planning Cycles, a company that helps startups, individuals, and small businesses with their financial planning. He has a vast amount of experience in the finance sector, having managed Google Play accounts for some of the world’s most successful unicorns. Amit is an expert in his field, and he uses his knowledge to help others achieve their individual goals.