On Thursday, Congress passed a continuing resolution to fund the government at current levels through December. The House and Senate still must raise the federal debt limit by October 18 or risk the US defaulting on its spending obligations.
Despite getting close, the US has never gone into default before.
But what is the debt limit? Why does it keep needing to be raised? And how is it related to the government shutdowns?
The debt limit, or debt ceiling, is a restriction on how much the government can borrow to pay its bills. When Congress appropriates or directs government money to be spent, the government is obligated to pay those funds, creating a bill it must pay. When spending exceeds the amount of revenue coming in, the government borrows to pay its bills. As a result, the debt limit only relates to spending already approved and appropriated by Congress.
Although the country has always placed limits on borrowing, the US managed those limitations on a nearly case-by-case basis for the first 150 years. This practice became cumbersome as the country’s government systems increased in complexity. In the 1920s and 30s, Congress delegated some authority to the Treasury Department to manage the US borrowing limits, but it did not solve the problem. In 1939, Congress passed a law that removed various separate limits on government debt and replaced it with a general restriction, what is now referred to as the debt limit or debt ceiling. The initial debt ceiling was set at $45 billion.
For most of the 20th century, Congress increased the debt limit annually as needed. In April 2002, the government reached the debt limit, but Congress did not raise it as it had in the past. The Treasury Department used “extraordinary actions,” such as withholding payments to federal trust funds to allow the government to keep functioning. On June 27, 2002, Congress raised the limit by $450 billion. The affected trust funds were paid back with interest after the debt limit was increased.
A pattern emerged over the next seven years. As the US reached the debt limit annually, Congress struggled to agree on raising the limit. The Treasury Department used extraordinary actions to keep the government going. Finally, Congress increased the debt ceiling to avoid defaulting on its obligations.
In fiscal year 2008, Congress stopped agreeing to pass annual debt limit increases and passed short term limit increases instead. In 2011, after multiple attempts to raise the debt limit failed, Congress passed the Budget Control Act. The law raised the debt limit but imposed automatic, across-the-board cuts to future spending by the same amount the debt limit was increased. Even with those cuts, overall spending in the US increased yearly. The last time Congress actively increased the debt limit was in 2011, raising it by $2.1 trillion to $16.394 trillion.
Since 2013, Congress instead has passed temporary suspensions of the debt limit. When the suspensions end, the debt limit resets to the debt amount at the time. The first suspension, from February to May of 2013, led to another round of extraordinary actions by the Treasury Department. In fall of that year, Congress suspended the limit again.
The most recent suspension ended on July 31, 2021. The Treasury Department has since been maintaining debt levels using extraordinary actions. On July 23, August 2, September 2, and September 28, Treasury Secretary Yellen sent official requests to Congress to raise the debt ceiling. In the most recent letter, Treasury estimated that its ability to manage the debt using extraordinary actions would be exhausted by October 18, noting, “It is uncertain whether we could continue to meet all the nation's commitments after that date.”
If the Treasury Department is not able to borrow additional money, the US could default on outstanding loans and its credit rating may be downgraded by credit rating groups in response. This would negatively impact the US economy and international financial markets.
Congress is required to pass a budget resolution by October 1, the start of the next fiscal year. If it does not, it can pass a continuing resolution that maintains spending at current levels. Failing to do so can result in the government shutting down due to a lack of funds. This results in a number of consequences such as furloughed government employees and the closing of national parks and other government facilities. Budget resolutions and the federal debt limit have been connected before although it is not required. From 1974 to 1994, Congress passed budget resolutions that raised the debt limit equal to new spending. In 1995, Congress listed the budget resolution and debt limits as separate items.
Congress and the White House have used the debt limit as a negotiating tool during budget debates. Otherwise, the debt limit and government shutdowns are unconnected.
Learn more about government spending, revenue, and debt with the USAFacts annual 10-K report.
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