Appropriations.com

Background on the Debt Limit

by Charles S. Konigsberg, J.D., former General Counsel, U.S. Senate Finance Committee

When Congress enacts more spending authority for a year than Treasury collects in revenues, annual deficits result. The government has run annual deficits every year since 2002—when major tax cuts were enacted. Later, annual deficits ballooned with military operations in Iraq and Afghanistan, responses to the Great Recession and COVID-19, and rapid increases in Social Security, Medicare, and Medicaid spending due to retirement of the boomers and rising healthcare costs.

When the government runs annual deficits, Treasury must issue new debt to cover the shortfall. The public debt is the accumulated debt of the federal government. When the federal government runs a budget deficit, the additional borrowing to finance that deficit adds to the accumulated federal debt. By contrast, whenever the federal government runs a budget surplus, as it did during fiscal years 1998 through 2001, the public debt decreases because Treasury uses surplus revenues to redeem outstanding debt, rather than borrowing additional funds to redeem the debt.

Most public debt is held outside the government—called debt-held-by-the-public—by individuals, corporations, institutions, the Federal Reserve, and state, local and foreign governments; and a lesser amount is held by federal trust funds that are required to place their surpluses in Treasury securities for safekeeping.

As of January 2023, debt-held-by-the-public was approximately $24.5 trillion, debt held by federal trust funds was approximately $7 trillion, and total public debt was about $31.4 trillion. Real-time  debt numbers can be accessed at: https://fiscaldata.treasury.gov/datasets/debt-to-the-penny/debt-to-the-penny.

A crucial distinction to keep in mind when discussing federal debt is the difference between “total public debt” and “debt-held-by-the-public.” As reflected in Table 10 below, while total public debt in January 2023 was more than $31 trillion, debt-held-by-the-public was closer to $24.5 trillion.[1] 

Statutory Limit on the Public Debt (“Debt Limit”)

The Constitution, in Article I, Section 8 grants Congress the power to “borrow Money on the credit of the United States,” thus mandating that Congress exercise control over the public debt.[2] Since ratification of the Constitution, Congress has placed restrictions of various types on federal borrowing, for example, in the Second Liberty Bond Act of 1917.[3] In 1939, Congress enacted the first aggregate limit covering nearly all federal debt, and commonly referred to as the “debt limit” or “debt ceiling.”[4] Since that time, when the activities of the federal government require a higher limit, Congress enacts a law to raise the debt limit—permanently or temporarily—or suspends the debt limit for a period of time.

The debt limit approximates total public debt, which includes:

  • Debt-held-by-the-public (debt held by individuals, corporations, institutions, state and local governments, the Federal Reserve System, foreign governments and central banks); plus
  • Debt held by federal government accounts (also known as intragovernmental debt), for example, debt held by the Social Security, Medicare, and federal retirement trust funds, which are required by law to invest cash surpluses in Treasury securities.[5]

The debt limit has required frequent legislative action for three reasons.

  • First, as explained above, total public debt grows when Congress approves annual deficits. When the federal government’s total spending in a fiscal year exceeds total revenues, the Treasury finances the difference by borrowing, which increases debt-held-by-the-public.
  • Second, total public debt grows when government trust funds run surpluses leading to increases in intragovernmental holdings.
  • Third, Congress has chosen to increase the debt limit in increments only. The incremental increases can be temporary or permanent, or in other cases, the debt limit is simply suspended for a period of time. Why this curious arrangement? Quite simply, the debt limit is a political instrument—not an instrument of fiscal control.

One might assume that a mechanism called “the statutory limit on the public debt” serves as a form of budgetary or fiscal restraint. However, in reality, the debt limit provides no restraint on deficits or accumulated debt because raising the debt limit is simply a consequence of prior decisions on spending and revenues.

Once Congress has enacted spending authority at levels that exceed annual revenues, the Treasury must raise the necessary cash to fulfill those legal obligations—whether for timely redemption of U.S. bonds and timely interest payments; Social Security, Medicare, Veterans, nutrition, and unemployment benefits; paying U.S. troops; stabilizing U.S. farm prices; and payments to States for Medicaid, education, and highways (one-third of most state budgets).

Consequences of Reaching the Debt Limit

Failing to give Treasury the authority to raise the cash necessary to fulfill U.S. legal obligations would have devastating consequences. Failing to make interest payments on Treasury bonds, or redeeming bonds coming due, would undermine Treasury’s credit ratings in the U.S. and across the globe, pushing up interest rates and inflation, and risking recession. Running out of cash to pay troops and supply materiel would undermine international confidence in America’s international security guarantees. Failing to make federal benefit payments would harm retirees, veterans, disabled and disadvantaged Americans. Missing payments to States would cause chaos for hospitals, teachers, and companies under contract to repair and build roads, bridges, public transit, and water systems.

Some have argued that these consequences of failing to raise the debt limit are overstated, asserting that the President and Treasury Secretary can decide which of the government’s legal obligations to pay with available revenues. In 2014, a Treasury official stated that payment of principal and interest on government debt, while stopping payments on all other obligations might be technically possible.[6]  However, the President has no statutory authority to pick and choose among legal obligations of the United States and the Impoundment Control Act, as explained in this primer, forbids the President from overriding Congress’ spending decisions.

So why have a debt limit?  First, Members of Congress who are concerned about debt have only been willing to increase the debt in increments to be certain that every time the debt limit is reached, they have a “free pass” to rail against the evils of debt on the House or Senate Floor—without having to do the hard work of identifying specific spending and revenue reforms.

Second, due to the grave consequences of failing to honor U.S. financial obligations, debt limit increases are “must-pass” legislation and vehicles for new budget control strategies. This is what happened in 1985 with the Gramm-Rudman-Hollings law, and again in 2011 when that year’s debt limit increase became the vehicle for the Budget Control Act. As discussed elsewhere in this primer, both of those laws failed to achieve the budget control they promised; automatic budget mechanisms seldom do.

Consequently, frequent debt limit debates have become an unfortunate reality in Congress—unfortunate because the threat of Treasury default accomplishes nothing and risks everything. The hard reality is that debt increases will abate only when annual deficits shrink—and that happens only when lawmakers use the existing tools of the congressional budget process to set priorities and make difficult policy decisions on spending and revenues.

Debt Limit Resources:

[1] Current totals are available at the U.S. Treasury Department’s webpage Debt to the Penny: https://fiscaldata.treasury.gov/datasets/debt-to-the-penny/debt-to-the-penny.

[2] U.S. Const., art. I, §8, cl. 2.

[3] Second Liberty Bond Act of 1917, 49 Stat. 21. See D. Andrew Austin, Cong. Rsch. Serv., RL31967, The Debt Limit: History and Recent Increases, Summ. (November 2, 2015), accessed at https://crsreports.congress.gov/product/pdf/RL/RL31967/139; and D. Andrew Austin, Cong. Rsch. Serv., R43389, The Debt Limit Since 2011 (April 1, 2021), accessed at: https://crsreports.congress.gov/product/pdf/R/R43389/63.

[4] A Bill to Amend the Second Liberty Bond Act, Pub. L. No. 76-201, 53 Stat. 1071, codified at 31 USC 3101, accessed at: https://uscode.house.gov/statviewer.htm?volume=53&page=1071.

[5] See Cong. Budget Off., The Outlook for Major Federal Trust Funds: 2020 to 2030, Table 1 (September 2020), https://www.cbo.gov/publication/56541.

[6] May 7 letter from Treasury Assistant Secretary Alistair Fitzpayne to House Financial Services Committee Chairman Jeb Hensarling stating: “If the debt limit were not raised, and assuming Treasury had sufficient cash on hand, the New York Fed’s systems would be technologically capable of continuing to make principal and interest payments while Treasury was not making other kinds of payments,” accessed at: https://www.reuters.com/article/us-usa-treasury-debt-idUSBREA480R520140509.

TRILLIONS: A Primer on Federal Spending, Taxes, the U.S. Debt Ceiling, and Fiscal Law
 by Charles S. Konigsberg
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