What is the Debt Limit?

Links to sections below: 
Deficits v. Debt
Public Debt v. Debt-Held-By-The-Public
Statutory Limit on the Public Debt (“Debt Limit” or “Debt Ceiling”)
Consequences of Reaching the Debt Limit
Extraordinary Measures to Avoid Reaching the Debt Limit
Why Have a Debt Limit?
The House “Gephardt Rule” and the Automatic Debt Limit
Growth of the Debt: How Much is Too Much?

Deficits v. Debt

When Congress enacts more spending authority for a year than Treasury collects in revenues, annual deficits result. For example, in FY 2023, estimated outlays are $6.2 trillion, estimated revenues are $4.8 trillion and the projected deficit is $1.4 trillion. The government has run annual deficits every year since FY 2002—when major tax cuts went into effect. Later, annual deficits ballooned with military operations in Iraq and Afghanistan, responses to the Great Recession and COVID-19, and rapid increases in Medicare, Social Security, and Medicaid spending due to retirement of the baby boomers and growing healthcare costs.

Deficits are annual; debt is accumulated. When the federal government runs a budget deficit, the additional borrowing to finance that deficit adds to the accumulated federal debt.[1] Most public debt is held outside the government, called debt-held-by-the-public—held 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. (Back to beginning)

Public Debt v. Debt-Held-by-the-Public

An important distinction to keep in mind when discussing federal debt is the difference between “total public debt” and “debt-held-by-the-public.”  For example, the numbers below are the status of public debt and debt-by-the-public as of April 26, 2023. Both numbers are updated daily by the Treasury Department at: https://fiscaldata.treasury.gov/datasets/debt-to-the-penny/debt-to-the-penny.[2]

(Back to beginning)

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

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.^[5] Since ratification of the Constitution, Congress has placed limitations of various types on federal borrowing, for example, in the Second Liberty Bond Act of 1917, during World War I, which authorized Treasury to issue approximately $7.5 billion in debt. [6]

In 1939, Congress enacted the first aggregate limit—$45 billion—approximating total public debt, and commonly referred to as the “debt limit” or “debt ceiling.”^[7] 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 in recent years has suspended the debt limit for various periods of time.

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.
• 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.

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 at all because raising the debt limit is a consequence of prior decisions on spending and revenues.

Once Congress has enacted spending authority for a fiscal year at levels that exceed annual revenues, the Treasury must raise the necessary cash to fulfill the government’s legal obligations. The time to limit the growth of debt is during the budget process when specific decisions are made on appropriations, direct spending, and revenues.

After the budget process for a fiscal year is completed, with spending and revenue decisions set in law by Congress, the Treasury must issue debt in sufficient amounts to fulfill the financial obligations of the United States, whether for interest payments on U.S. debt; redemption of U.S. bonds; Social Security, Medicare, and Veterans payments; U.S. troop salaries and materiel; payments to maintain stability in the U.S. farm sector; payments to states for Medicaid, education, and highways (amounting to one-third of most State budgets); and all other federal obligations.  (Back to beginning)

Consequences of Reaching the Debt Limit

If Congress refuses to give Treasury the authority to raise the cash necessary to fulfill U.S. legal obligations, the consequences would be devastating, including:

• Failing to make interest payments on Treasury bonds, or failing to redeem bonds coming due, would undermine Treasury’s credit ratings in the U.S. and across the globe, pushing up interest rates and inflation, and almost certainly leading quickly to a deep recession.
• Running out of cash to pay troops and supply materiel would undermine international confidence in America’s security guarantees.
• Failing to make federal benefit payments would harm retirees, veterans, disabled, and disadvantaged Americans.
• Missing payments to the states would cause chaos for hospitals, teachers, and companies under contract to repair and build roads, bridges, public transit, water systems, ports and airports.
• Testimony at Senate Budget Committee on the consequences of reaching the debt limit:

Some have argued that the 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 honor 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.[8]  However, the President and Treasury Secretary have no statutory authority to select among legal obligations of the United States, and the Impoundment Control Act (as explained in Chapter 5) expressly forbids the President from overriding Congress’ spending decisions.  (Back to beginning)

Extraordinary Measures to Avoid Reaching the Debt Limit

The Treasury Department has many times taken “extraordinary measures” to delay the date when they run out of authority to issue debt in order to fulfill U.S. financial obligations. The most recent example occurred on January 13, 2023, when Secretary of the Treasury Janet Yellen informed Congress that the outstanding debt of the U.S. is project to reach the statutory limit of $31.381 trillion and that two extraordinary measures would be taken to avoid default:

• Redeeming existing, and suspending new, investments of the Civil Service Retirement and Disability Fund (CSRDF) and the Postal Service Retiree Health Benefits Fund (Postal Fund); and
• Suspending reinvestment of the Government Securities Investment Fund (G Fund) of the Federal Employees Retirement System Thrift Savings Plan.[9]

Other extraordinary measures the Treasury has under current consideration include:

• Suspending Reinvestment of the Exchange Stabilization Fund; and
• Suspending Sales of State and Local Government Series Treasury securities.

The Treasury Department explained the operation of these measures in a January 19, 2023 release.[10]

(Back to beginning)

Why Have a Debt Limit?

If the consequences of reaching the debt limit are dire, why have a debt limit?  The answer is twofold. First, the debt limit is a political instrument. Incremental increases in the debt limit ensure that every time the debt limit is looming, Members of Congress have a political opportunity to rail against the evils of debt on the House or Senate Floor, without having to propose specific spending and tax reforms.

Second, due to the grave consequences of failing to honor U.S. financial obligations, debt limit increases are must-pass legislation and, therefore, vehicles for budget process and other reforms. This is what happened in 1985 with the Deficit Control Act that attempted to use across-the-board cuts to balance the budget; 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, those laws failed to achieve their objectives. Automatic budget-cutting mechanisms rarely succeed and are not a substitute for the substantive work of detailed spending and tax reforms.

Nevertheless, the desire in Congress to rail against debt and devise new, automatic budget-cutting mechanisms persists, with frequent debt limit debates still an unfortunate reality in Congress along with the increasingly frequent risks to the U.S. and global economies.  (Back to beginning)

The House “Gephardt Rule” and the Automatic Debt Limit

In 1979, the House adopted a rule aimed at avoiding votes on the debt limit.[11]  Named after then House Majority Leader, Representative Dick Gephardt (D-MO), the “Gephardt Rule” provided that adoption by the House of the annual budget resolution would require the House Clerk to process[12] a joint resolution increasing the debt limit based on the amount set forth in the budget resolution.[13]

The budget resolution, itself, cannot increase the debt limit because, as a concurrent resolution of Congress, it does not go to the President and does not become law.

Under the Gephardt rule, the automatic debt limit measure, triggered by the budget resolution, would be considered adopted by the House and sent to the Senate for that body to consider—thereby avoiding a separate debt limit vote by the House. The Senate would nevertheless need to debate and pass the debt limit measure before it went to the President. This effectively defeated the purpose of the rule, since the Senate’s consideration is subject to unlimited debate and amendment, and any amendment by the Senate would send the measure back to the House.

Despite the rule’s ineffectiveness at avoiding recurring risks to the U.S. and global economies, the House has revised, repealed, and reinstated the Gephardt rule several times.[14] Most recently, the Gephardt rule was reinstated in the 117^th Congress, but repealed in 2023 at the beginning of the 118^th Congress.[15]

The unavoidable reality is that as long as Congress insists on having a statutory limit on the public debt, and increasing the limit in incremental amounts, the risks to the U.S. and global economies of a U.S. default on its legal obligations will recur repeatedly.

Solutions to the debt limit quandary include the House and Senate adopting consistent Gephardt-type rules or repealing the debt limit entirely, since the debt limit does not actually control U.S. debt—spending and revenue legislation determines debt. Unfortunately, neither solution is likely for the political reasons explained above.  (Back to beginning)

Growth of the Debt: How Much is Too Much?

At the heart of the debt limit debate is fear that too much Treasury borrowing will damage the U.S. economy. Some economists argue that too much government borrowing will crowd out private sector borrowing needed for investments and economic growth. Others point out that much of the cash borrowed by Treasury goes to private sector contractors and recipients of government benefits, which stimulate investment and demand, leading to economic growth.

Treasury debt-held-by-the-public as a percentage of GDP,^[16] which excludes debt held by government trust funds, has fluctuated wildly over the decades. Before the U.S. entered World War II in 1940, debt-held-by-the-public was 43.6% of GDP.  By 1945, war expenditures had more than doubled this to 103.9% of GDP.

Rapid economic growth in the 1950s brought this down to 43.6% by 1961. Despite heavy government spending in the 1960s and 1970s due to the Vietnam War and President Johnson’s Great Society programs (e.g., Medicare), debt-held-by-the-public fell to 25% of GDP by 1979.

In the 1980s, due to recession, tax cuts, and entitlement growth, debt as a percent of GDP began rising to 40.9% of GDP by 1990. However, three major deficit reduction reconciliation bills in the 1990s, along with significant economic growth, brought this down to 33.7% by 2000.

During the 2000s, debt-held-by-the-public as a percent of GDP nearly doubled to 60.0% by 2010 due to large tax cuts, major spending on the wars in Iraq and Afghanistan, the financial crisis and Great Recession, and rapid growth in Medicare, Social Security, and Medicaid with the aging of the population and the rapid rise in healthcare expenditures.

The 2010s saw an explosive rise in debt-held-by-the-public as a percent of GDP to 100.3% by the end of FY 2020, with the largest increases following enactment of the Trump tax cuts in 2017 and the COVID-19 recession in early 2020. Debt-held-by-the-public in the early 2020s continues to hover around 100% of GDP, with total public debt at about 130% of GDP.

No one knows what amount of government debt as a percent of the economy should be concerning. However, there is one common sense measure that should concern us—interest payments. Federal interest payments on the debt are growing rapidly and taking a huge bite out of federal revenues each year. This scenario, where larger and larger amounts are being borrowed each year simply to pay interest on a ballooning debt, is a vicious cycle that cannot be sustained and must not be ignored.

Two numbers underscore the dangers of rising interest payments: interest payments will reach nearly $1 trillion within five years, by FY 2028;[17] and interest payments rise to nearly one-quarter of all federal spending by 2052 if current spending and tax policies continue.[18]

As a matter of fiscal policy, it is not clear how much debt is too much. However, it is painfully clear that interest payments consuming nearly a quarter of all federal spending—more than defense or Social Security—is unsustainable and must be avoided.

The answer is for Congress to enter into bipartisan negotiations on spending and tax reforms, to place the U.S. on a more sustainable path. This was successfully accomplished under Presidents George H.W. Bush in 1990 and Bill Clinton in 1997. There is no reason this cannot be accomplished again.

It is equally clear that refusing to let Treasury pay bills that have already come due, by interfering with a necessary increase in the debt limit, is a violation of U.S. legal and financial commitments that accomplishes nothing and risks—literally—everything.  (Back to beginning)

[1] By contrast, when the federal government runs a budget surplus, as it did during fiscal years 1998 through 2001, the public debt decreases because the Treasury Department uses surplus revenues to redeem outstanding debt.

[2] In addition, Treasury Department communications on the debt ceiling are available at: https://home.treasury.gov/policy-issues/financial-markets-financial-institutions-and-fiscal-service/debt-limit.

[3] Full definition: “All federal debt held by individuals, corporations, state or local governments, Federal Reserve Banks, foreign governments, and other entities outside the United States Government less Federal Financing Bank (FFB) securities. Debt held by the public is composed of Treasury Bills, Notes, Bonds, Treasury Inflation-Protected Securities (TIPS), Floating Rate Notes (FRNs), Domestic Series, Foreign Series, State and Local Government Series (SLGS), United States Savings Securities, and a portion of Government Account Series (GAS) securities,” accessed at: https://fiscaldata.treasury.gov/datasets/debt-to-the-penny/debt-to-the-penny.”

[4] See Cong. Budget Off., The Outlook for Major Federal Trust Funds: 2020 to 2030, Table 1 (Sept. 2020).

[5] U.S. Const., art. I, § 8, cl. 2.

[6] Second Liberty Bond Act, Sept. 24, 1917, 40 Stat. 35, https://USC §ode.house.gov/statviewer.htm?volume=40&page=288.

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

[8] 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 on Mar. 22, 2023 at: https://www.reuters.com/article/us-usa-treasury-debt-idUSBREA480R520140509.

[9] Jan. 13, 2021 letter from Treasury Secretary Janet Yellen to House Speaker Kevin McCarthy, accessed at: https://home.treasury.gov/system/files/136/Debt-Limit-Letter-to-Congress-McCarthy-20230113.pdf.

[10] See Description of Extraordinary Measures (Jan. 19, 2023), https://home.treasury.gov/system/files/136/Description_Extraordinary_Measures-2023_01_19.pdf.

[11] Adopted as Rule XLIV of the Standing Rules of the House (96^th Congress).

[12] The technical term is “engrossment” of the joint resolution.

[13] One of the amounts required to be included in the budget resolution is the appropriate level of the public debt. Congressional Budget and Impoundment Control Act of 1974, as amended, § 301, 2 U.S.C. § 632(a).

[14] This is chronicled in detail in Cong. Rsch. Serv., RL31913, Debt Limit Legislation: The House “Gephardt Rule,” (Feb. 13, 2019).

[15] H.R. Res. 5, § 2 (118^th Congress) repealing Rule XXVIII.

[16] The size of the economy is most often measured as Gross Domestic Product (GDP) which is: “The value of all final goods and services produced within the borders of a country…in a given period, whether produced by residents or nonresidents. The components of GDP are personal consumption…, gross private domestic investment, net exports of goods and services, and government consumption….” U.S. Gov’t Accountability Off., GAO-05-734SP, A Glossary of Terms Used in the Federal Budget Process, 58 (2005).

[17] Cong. Budget Off., The Budget and Economic Outlook: 2023 to 2033, By the Numbers (2023).

[18] Cong. Budget Off., The 2022 Long-Term Budget Outlook, Figure 2-3 (2022).