Understanding the Debt Ceiling

The federal debt ceiling will be reinstated on August 1, 2021, at around $28.5 trillion. At that point, the Treasury Department will begin using accounting tools at their disposal, called “extraordinary measures,” to avoid defaulting on the government’s obligations. The Treasury Department has estimated that these measures will be exhausted as soon as mid-to-late-September, while the Congressional Budget Office (CBO), the Bipartisan Policy Center and other outside analysts predict exhaustion in the fall near the start of the next fiscal year (e.g., likely September, October, or November). At that point, absent a new agreement to either raise or suspend the debt ceiling, the Treasury will be unable to continue paying the nation’s bills. Congress could address the debt ceiling through reconciliation, which provides for passage of legislation with a simple majority vote in the Senate.

The national debt is the total amount of outstanding borrowings by the U.S. Federal government, accumulated over our history. The Federal government needs to borrow money to pay its bills when its ongoing operations cannot be funded by Federal revenues alone. When this happens, the U.S. Treasury Department creates and sells securities. These securities are the debt owed by the Federal government. There are many different types of Treasury debt; bills, notes, and bonds are the most common ones. The various types of debt differ primarily in when they mature—ranging from a few days to 30 years—and in how much interest they pay. The United States has not run an annual surplus since 2001, and has thus borrowed to fund government operations every year since then.

The debt limit is a ceiling imposed by Congress on the amount of debt that the U.S. Federal government can have outstanding. This limit has been set at $28.4 trillion since August 1st, 2021.

It is also important to note that the debt limit is not a forward-looking budgeting tool that reveals what policymakers think are ideal levels of spending and revenue. Rather, it reflects the spending and revenue decisions debated and enacted in prior years by prior Congresses and Administrations; in fact, 97 percent of the current national debt stems from policy choices made before the Biden Administration took office in January 2021—choices made by both parties on their own and in a bipartisan fashion. The debt limit is the amount that the U.S. Treasury can borrow to pay the bills that have become due based on these prior policy decisions.

Once the debt limit is hit, the Federal government cannot increase the amount of outstanding debt; therefore, it can only draw from any cash on hand and spend its incoming revenues. The U.S. Treasury can also take certain “extraordinary measures” to extend how long it can continue to pay all the government’s obligations while staying below the limit. These measures include accounting techniques within several government accounts that temporarily reduce the amount of U.S. Treasury securities issued to those accounts. These actions include suspending new investments or redeeming existing investments early. By reducing the amount of outstanding Treasury securities, the level of outstanding debt temporarily falls, slightly extending the amount of time that the government can continue to satisfy its obligations.

When the U.S. Treasury exhausts its cash and extraordinary measures, the Federal government loses any means to pay its bills and fund its operations beyond its incoming revenues, which only cover part of what is required (about 80 percent in 2019). While the United States has hit the debt limit before, it has never run out of resources and failed to meet its financial obligations. Take the debt limit crises in 2011 and 2013, for example; the debt ceiling was raised in the former episode (Congress raised the cap by an explicit dollar amount) and suspended in the latter (Congress eliminated the debt limit entirely for a specified period of time) in time, before the U.S. Treasury ran out of cash and exhausted all extraordinary measures. More recently, in 2019, the United States once again hit the debt limit, but Congress suspended the ceiling, eliminating the cap until August 1st, 2021.