In some cases, delaying payments incurs interest penalties under some statutes such as the Prompt Payment Act, which directs the government to pay interest penalties to contractors if it does not pay them by the required payment date, 11 and the Internal Revenue Code, which requires the government to pay interest penalties if tax refunds are delayed beyond a certain date. Several credit ratings agencies and investment banks have expressed concerns about the consequences to the financial system and the economy if the U.
Treasury were unable to fund federal obligations. Past Treasury Secretaries, when faced with a nearly binding debt ceiling, have used special strategies to handle cash and debt management responsibilities.
Actions taken in the past include suspending sales of nonmarketable debt, postponing or downsizing marketable debt auctions, and withholding receipts that would be transferred to certain government trust funds.
Congress has authorized the Treasury Secretary to invoke a "debt issuance suspension period" to use some of these strategies using the Civil Service Retirement Fund and the Thrift Savings Fund, along with the authority to make those funds whole after an easing of the debt constraint.
Some U. Treasury responses to the credit crunch that began in mid created balance sheet items that expanded options available to the Treasury Secretary, although such options would now have minor effects on delaying when federal debt would reach its legal limit. The U. Treasury began selling off certain mortgage-backed securities MBSs acquired in late Treasury to maintain smooth debt management operations indefinitely in the face of a continuing imbalance between federal revenues and outlays without an increase in the debt limit.
Treasury contends that other types of asset sales are unlikely to provide a prudent or practical method of easing debt limit constraints. Some have suggested that the Fourteenth Amendment Section 4 , which states that " t he validity of the public debt of the United States President Obama has rejected such claims, as have most legal analysts.
The debt limit can hinder the Treasury's ability to manage the federal government's finances, as noted above. In extreme cases, when the federal debt is very near its statutory limit, the Treasury must take unusual and extraordinary measures to meet federal obligations. The debt limit also provides Congress with the strings to control the federal purse, allowing Congress to assert its constitutional prerogatives to control spending. In the words of one author, the debt limit "expresses a national devotion to the idea of thrift and to economical management of the fiscal affairs of the government.
While the budget process provides Congress with one means of controlling federal spending, the debt limit may provide a different sort of leverage that is not redundant. Congress ordinarily delegates work to its committees. The Committees on Appropriations have special responsibilities regarding discretionary spending, and authorizing committees are generally responsible for mandatory program spending decisions, while Committees on the Budget are tasked with drafting an overall budgetary framework that specifies aggregate levels for federal spending and taxation.
While those committees often incorporate views of other committees and Members, measures involving the debt limit often provide individual Members not belonging to those committees with a separate instrument to influence federal fiscal policy.
Congress has always placed restrictions on federal debt. Limitations on federal debt have helped Congress assert its constitutional powers of the purse, of taxation, and of the initiation of war. Between World War I and World War II the form of statutory restrictions on federal debt evolved into an aggregate limit that applied to nearly all federal debt outstanding.
Before World War I, Congress often authorized borrowing for specified purposes, such as the construction of the Panama Canal. In other cases, especially in time of war, Congress provided the Treasury with discretion, subject to broad limits, to choose debt instruments. Proponents contended that federal borrowing would not disrupt settlements on such monetary issues reached in and Such concerns became moot after the establishment of the Federal Reserve System in For example, the War Revenue Act of allowed Treasury to use certificates of indebtedness, which had maturities of a year or less, and were used for short-term borrowing and cash management, as well as long-term bonds.
Proponents of the act, however, made clear their intention to allow the Treasury Secretary substantial administrative leeway within those limits. Over time, the leeway granted the Treasury Secretary tended to expand.
For example, the Second Liberty Bond Act of , which helped finance the United States' entry into World War I, dropped certain limits on the maturity and redemption of bonds. Features of debt authorized by previous acts, such as the broad tax exemption for First Liberty Bond Act securities, remained intact. Subsequent borrowing measures were drafted as amendments to Second Liberty Bond Act until In the s, Congress provided Treasury Secretary Andrew Mellon with additional leeway in order to replace expensive older federal debt with cheaper new issues.
Congress allowed Treasury to issue notes, a financial instrument issued extensively in the Civil War and rarely thereafter, and limited the amount of notes outstanding, rather than the sum of issuances, which gave greater Treasury flexibility to roll over debt.
Savings certificates designed for small investors were also reintroduced. In the s, Congress moved towards aggregate constraints on federal borrowing that allowed the Treasury greater ability to respond to changing conditions and more flexibility in financial management.
In , Treasury Secretary Mellon, noting that Liberty bonds would become ready for refinancing in the next few years, argued that "orderly and economical management of the public debt requires that the Treasury Department should have complete freedom in determining the character of securities to be issued and should not be confronted with any arbitrary limitation. Treasury greater flexibility in issuing bonds in In , Treasury Secretary Henry Morgenthau called for replacing a limit on bond issuance with a more flexible limit on the amount of outstanding bonds.
This change underlined Treasury bonds' role as a means of managing federal finances rather than securities tied to specific projects or wars. In March , President Franklin Roosevelt and Secretary Morgenthau asked Congress to eliminate separate limits on bonds and on other types of debt. On July 14, the amendment was withdrawn in the Senate after the House had disagreed, thus clearing the way for President Franklin Roosevelt's signature. When enacted on July 20, the law P.
This measure gave the Treasury freer rein to manage the federal debt as it saw fit. Thus, the Treasury could issue debt instruments with maturities that would reduce interest costs and minimize financial risks stemming from future interest rate changes. Although the Treasury was delegated greater independence of action on the eve of the United States' entry into World War II, the debt limit at the time was much closer to total federal debt than it had been at the end of World War I.
The Eisenhower Administration had requested an increase in the State of the Union address, but Congress declined to raise the limit until it approved a temporary increase in August Congress declined to raise the limit until the following February, in part to "compel more economy of efficiency, better management of money and manpower in the defense program.
Since then, Congress has enacted 78 separate measures that have altered the limit on federal debt. Some recent increases in the debt limit, however, were large in dollar terms.
Since FY, however, debt held by the public has grown due to persistent and substantial budget deficits. Debt held in government accounts also has grown, in large part because Social Security payroll taxes have exceeded payments of beneficiaries. Table 1 shows components of debt in current dollars and as percentages of gross domestic product GDP since FY Table 1.
Source: U. Notes: Amounts held by government accounts and held by the public for FYFY are approximated. In , the Treasury publications began distinguishing holders of debt subject to limit. The numbers in the table showing this breakdown for FY through FY were calculated by subtracting debts of the Federal Financing Bank, an arm of the Treasury whose debt is subject to a separate limit, from intragovernmental debt. This calculation overestimates debt by billions of dollars because estimates of unamortized discount are unavailable.
This adjusted amount was then subtracted from total debt subject to limit for an approximate measure of debt held by the public subject to limit. Because intragovernmental debt is overestimated, debt held by the public is underestimated. Totals may not sum due to rounding. Figure 1. Table 2. Modifications of the Debt Limit Increased the debt limit temporarily through September 30, Temporarily exempted from limit obligations in an amount equal to the monthly insurance benefits payable under Title II of the Social Security Act in March , the exemption to expire on the earlier of an increase in the limit or March 15, Temporarily exempted from limit a obligations in an amount equal to the monthly insurance benefits payable under Title II of the Social Security Act in March and b certain obligations issued to trust funds and other federal government accounts, both exemptions to expire on the earlier of an increase in the limit or March 30, See discussion in first section of this report.
Debt limit suspended until May 19, Debt limit suspended until February 7, Federal debt held by government accounts has grown steadily since , in part due to increases in Social Security taxes passed following recommendations of the Greenspan Commission, and reflecting the transition of the baby boom generation into its peak earnings years.
Debt held by the public, which changes in response to total surpluses or deficits, grew as a share of GDP through the mids. When large deficits returned and GDP growth slowed in the early s, debt held by the public as a share of GDP again increased. Accumulating debt in government accounts produced most of the pressure on the debt limit that occurred early in As deficits reemerged in FY, increases in debt held by the public added to the pressure on the debt limit in the spring of In the fall of , the Administration recognized that a deteriorating budget outlook and continued growth in debt held by government accounts were likely to lead to the debt limit soon being reached.
As the debt moved closer to and reached the debt limit over the first six months of FY, the Administration asked Congress repeatedly to increase the debt limit, warning of adverse financial consequences were the limit not raised. On April 4, , the Treasury held debt below the limit by invoking its legislatively mandated authority to suspend reinvestment of government securities in the G-Fund of the federal employees' Thrift Savings Plan TSP.
This allowed the Treasury to issue new debt and meet the government's obligations. Once April 15 tax revenues flowed in, the Treasury "made whole" the G-Fund by restoring all of the debt that had not been issued to the TSP over this period and crediting the fund with interest it would have earned on that debt.
The Treasury, for the second time in , used its statutory authority to avoid a default. The Treasury's financing problems, however, would persist without an increase in the debt limit. On May 14, the Treasury asked Congress to raise the debt limit or enact other statutory changes allowing the Treasury to issue new debt.
A Treasury news release stated "absent extraordinary actions, the government will exceed the statutory debt ceiling no later than May 16," and that. The Treasury reduced federal debt held by these government accounts by replacing it with non-interest-bearing, non-debt instruments, which enabled it to issue new debt to meet the government's obligations. The Treasury claimed these extraordinary actions would suffice, at the latest, through June 28, Without a debt limit increase by that date, the Treasury indicated it would need to take other actions to avoid breaching the ceiling.
By June 21, the Treasury had postponed a regular securities auction, but took no other actions. With large payments and other obligations due at the end of June and at the beginning of July, the Treasury stated it would soon exhaust all options to issue debt and fulfill government obligations, putting the government on the verge of a default.
During May and June , Congress took steps to increase the debt limit. The FY supplemental appropriations bill H. However, the Senate's supplemental appropriations bill S. The Senate leadership expressed strong reluctance to include a debt limit increase in the supplemental appropriation bill. Instead, on June 11, the Senate adopted a bill S.
The President signed the bill into law on June 28 P. Through the winter and into the spring, the Treasury repeatedly requested that the debt limit be raised to avoid serious financial problems. By February 20, , the Treasury, as in , used legislatively mandated measures to manage debt holdings of certain government accounts to avoid reaching the debt limit.
These actions included the replacement of internally held government debt with non-debt instruments in certain government accounts and not issuing new debt to these accounts. These actions allowed the Treasury to issue additional debt to the public to acquire the cash needed to pay for the government's commitments or to issue new debt to other federal accounts.
The Senate received the debt-limit legislation on April 11, but did not act until May 23, after receiving further Treasury warnings of imminent default. The Senate adopted the legislation, after rejecting eight amendments and sent it to the President, who signed it on May The Treasury employed methods used in the previous two years to keep debt under the legal limit.
On October 14, Secretary of the Treasury John Snow informed Congress, just before the election recess, that available measures to avoid breaching the debt limit would be exhausted by mid-November. Although the House passed a budget resolution for FY in the spring of , it did not reach final agreement with the Senate on the measure.
Without a budget resolution passed by Congress, no resolution to raise the debt limit could be deemed passed by the House automatically under the Gephardt rule. Consequently, no measure was available to send to the Senate. As the debt approached the limit through the summer and into the fall, no legislation was moved to raise the debt limit. Without that flexibility, the government would be unable to meet its financial obligations as the amount of debt neared the limit.
The legislation cleared the House, but the Senate did not act on it. After the elections, Senator Frist, on November 16, , introduced legislation S. The Senate approved the increase on November 17, The House considered and approved the increase on November The President signed the legislation into law P. Estimates made at that time anticipated the new limit would be reached between August and December Shortly before the increase in the debt limit, the Treasury delayed a debt auction and informed Congress that it would invoke a "debt limit suspension period" as it had in previous years.
The increase in the debt limit in mid-November allowed the Treasury to reschedule the debt auction and cancel, before it began, the "debt limit suspension period.
Debt limit increases in , , and took a less dramatic path than those in President Bush's first term. In , Congress included three reconciliation instructions in the FY budget resolution H. Neither committee reported a bill to raise the debt limit. Under the rule, the resolution was automatically deemed passed by the House and sent to the Senate. Through the end of the first session of the th Congress, the Senate had not considered H.
At the end of December , Secretary of the Treasury Snow wrote Congress that the debt limit would probably be reached in mid-February , although the Treasury could take actions that maintain the debt below its limit until mid-March. He therefore requested an increase in the debt limit. Secretary Snow authorized actions used previously by the Treasury, including declaring a debt issuance suspension period. As March began, the government was again close to becoming unable to meet its obligations.
During the week of March 13 the Senate took up H. On March 16, the Senate passed a debt limit increase after rejecting several amendments. The President's signature on March 20, , then raised the debt limit P. In mid-May , Congress passed the conference report H.
The House's Gephardt rule, triggered by the adoption of the conference report on the budget resolution, resulted in the automatic engrossment of a joint resolution in this case, H. At the end of July , the Treasury asked Congress to raise the debt limit, stating the limit would be reached in early October Without an increase, the Treasury indicated that it would take steps within its legal authority to avoid exceeding the debt limit.
The Senate then passed the measure on September 27, which the President signed on September 29, P. 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. Keep up with the latest data and most popular content. Issues Data Reports. Coronavirus Climate. Education Look at the data on educational progress and challenges.
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Population How the Native American population changed since the last census. View More. View All. The US must raise the debt ceiling by Oct. What does that mean? Despite a few close calls, the US has never defaulted on its debt. Despite getting close, the US has never gone into default before. What is the history of debt ceiling increases? What is the connection between the debt limit and a government shutdown? US Department of the Treasury. Last updated.
Congressional Research Service. Share On. Explore more of USAFacts. Related Articles View All. The cost of the longest US government shutdown. Spending in excess of incoming receipts has already been legally obligated; that spending will push debt beyond the ceiling. There is no plausible set of changes that could generate the instant surplus necessary to avoid having to raise or suspend the debt ceiling.
Some believe the Treasury Department could buy more time by engaging in other, unprecedented actions such as selling large amounts of gold, minting a special large-denomination coin, or invoking the Fourteenth Amendment to override the statutory debt limit. Whether any of these tools is truly available is in question, and the potential economic and political consequences of each of these options are unknown.
Once the government hits the debt ceiling and exhausts all available extraordinary measures, it is no longer allowed to issue debt and soon after will run out of cash-on-hand. At that point, given annual deficits, incoming receipts will be insufficient to pay millions of daily obligations as they come due.
A default, or even the perceived threat of one, could have serious negative economic implications. An actual default would roil global financial markets and create chaos, since both domestic and international markets depend on the relative economic and political stability of U. Interest rates would rise, and demand for Treasuries would drop as investors stop or scale back investments in Treasury securities if they are no longer considered a perfectly safe investment, thereby increasing the risk of default.
Even the threat of default during a standoff increases borrowing costs. If interest rates for Treasuries increase substantially, interest rates across the economy would follow, affecting car loans, credit cards, home mortgages, business investments, and other costs of borrowing and investment. The balance sheets of banks and other institutions with large holdings of Treasuries would decline as the value of Treasuries dropped, potentially tightening the availability of credit as seen most recently in the Great Recession.
A shutdown occurs when Congress fails to pass appropriations bills that allow agencies to obligate new spending. However, many more parties are not paid in a default. A default occurs when the Treasury does not have enough cash available to pay for obligations that have already been made.
In the debt ceiling context, a default would be precipitated by the government exceeding the statutory debt limit and being unable to pay all of its obligations to its citizens and creditors.
Without enough money to pay its bills, any of the payments are at risk, including all government spending, mandatory payments, interest on our debt, and payments to U. While a government shutdown would be disruptive, a government default could be disastrous. In a number of cases, Congress has attached debt ceiling increases to budget reconciliation legislation and other deficit reduction policies or processes.
Indeed, most of the major deficit reduction agreements made since have been accompanied by a debt ceiling increase, although causality has moved in both directions. On some occasions, the debt limit has been used successfully to help prompt deficit reduction, and in other cases, Congress has tacked on debt ceiling increases to deficit reduction efforts.
In nearly all instances in which a debt limit increase was either accompanied by deficit reduction measures or included in a deficit reduction package, lawmakers have generally approved temporary increases in the debt limit to allow time for negotiations to be completed without the risk of default.
Similarly, during the negotiations and consideration of the budget agreement, Congress approved six temporary increases in the debt limit before approving a long-term increase as part of the reconciliation bill implementing the deficit reduction agreement.
The Appendix contains further discussion of provisions attached to debt ceiling legislation, including bills in , , , , , and Policymakers should work promptly to raise or suspend the debt ceiling. Failing to raise the debt ceiling would be disastrous.
It would result in severe negative consequences that experts are not capable of predicting in advance.
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