Wednesday, October 16, 2013

United States debt ceiling

From Wikipedia, the free encyclopedia

The United States debt ceiling or debt limit is a legislative mechanism to limit the amount of national debt that can be issued by the Treasury. The debt ceiling is an aggregate figure which applies to the gross debt, which includes debt in the hands of the public and in Intragovernment accounts. Because expenditures are authorized by separate legislation, the debt ceiling does not directly limit budget deficits. In effect, it can only restrain Treasury from paying for expenditures after the limit has been reached, but which have already been approved (in the budget) and appropriated.
When the debt ceiling is actually reached without an increase in the limit having been passed, Treasury may resort to "extraordinary measures" to temporarily finance the government's expenditures and obligations until a resolution can be reached. The Treasury has never reached the point of exhausting extraordinary measures. If this situation were to occur, it is unclear whether Treasury would be able to prioritize payments on debt to avoid a default on its debt obligations, but it would at least have to default on some of its non-debt obligations. A default could trigger a variety of economic problems including a financial crisis and a decline in output that would put the country into a recession.


The United States has had some sort of legislative limit on debt since 1917. From time to time, political disputes arise when the Treasury advises Congress that the debt ceiling is about to be reached and indicating that a default is imminent. When the debt ceiling is reached, and pending an increase in the limit, Treasury may resort to "extraordinary measures" to buy more time before the ceiling can be raised by Congress. The United States has never reached the point of default where Treasury is incapable of paying its debt obligations, except in the War of 1812 when the Burning of Washington happened and parts of Washington D.C. including the Treasury were burned.[1]
In 2011, the United States reached a point of near default. The delay in raising the debt ceiling resulted in the first downgrade in the United States credit rating, a sharp drop in the stock market, and an increase in borrowing costs. Congress raised the debt limit with the Budget Control Act of 2011, which created the fiscal cliff and set a new debt ceiling that was reached on December 31, 2012. Treasury has adopted extraordinary measures to avoid a default on its obligations. On February 4, 2013, President Barack Obama signed a suspension of the debt ceiling that ran until May 19, 2013. After May 19, the debt ceiling was raised to $16.699 trillion, the level of debt incurred during the suspension, and Treasury resumed extraordinary measures.[2] Treasury Secretary Jack Lew notified Congress that these measures would be exhausted by October 17, 2013.[3] On October 7, 2013 Treasury indicated that the debt ceiling and extraordinary measures will be exhausted and that a default will occur on October 17 when interest payments are due.[citation needed]
The United States and Denmark are the only constitutional countries to have legislative restrictions on the incurring of public debt.[citation needed] The Danish debt ceiling is, however, mainly a formality and follows the budgeting and expenditure process and provides ample latitude for unforeseen deficits. It has never created the periodic crises as has the American. Wilbeck, Sigrid (11 August 2011). "Amerikanere kan lære af dansk gældsloft" [Americans could learn from Danish debt ceiling]. DR Nyheder (in Danish). Retrieved 16 October 2013.

Relationship to federal budget

The process of setting the debt ceiling is separate and distinct from the United States budget process, and raising the debt ceiling neither directly increases nor decreases the budget deficit, and vice versa. The Government Accountability Office explains, "the debt limit does not control or limit the ability of the federal government to run deficits or incur obligations. Rather, it is a limit on the ability to pay obligations already incurred."[4]
The President formulates a federal budget every year, which Congress must pass, sometimes with amendments, in a concurrent resolution, which does not require the President's signature and is not binding. The budget details projected tax collections and expenditures and, therefore, specifies the amount of borrowing the government would have to do in that fiscal year.

Legislative history

Prior to 1917, the United States had no debt ceiling. Congress either authorized specific loans or allowed Treasury to issue certain debt instruments and individual debt issues for specific purposes. Sometimes Congress gave Treasury discretion over what type of debt instrument would be issued.[5] The United States first instituted a statutory debt limit with the Second Liberty Bond Act of 1917. This legislation set limits on the aggregate amount of debt that could be accumulated through individual categories of debt (such as bonds and bills). In 1939, Congress instituted the first limit on total accumulated debt over all kinds of instruments.[6]
Prior to the Budget and Impoundment Control Act of 1974, the debt ceiling played an important role since Congress had few opportunities to hold hearings and debates on the budget.[7] James Surowiecki argued that the debt ceiling lost its usefulness after these reforms to the budget process.[8]
In 1979, noting the potential problems of hitting a default, Dick Gephardt imposed the "Gephardt Rule," a parliamentary rule that deemed the debt ceiling raised when a budget was passed. This resolved the contradiction in voting for appropriations but not voting to fund them. The rule stood until it was repealed by Congress in 1995.[9]

1995 debt ceiling crisis

The debt-ceiling debate of 1995 led to a showdown on the federal budget, which did not pass, and resulted in the United States federal government shutdown of 1995 and 1996.[10][11]

2011 debt ceiling crisis

In 2011, Republicans in Congress attempted to use the debt ceiling as leverage for deficit reduction. The delay in raising the debt ceiling led to the first ever downgrade in the federal government's credit rating. The credit downgrade and debt ceiling debacle contributed to the Dow Jones Industrial Average falling 2,000 points in late July and August. Following the downgrade itself, the DJIA had one of its worst days in history and fell 635 points on August 8.[12] The GAO estimated that the delay in raising the debt ceiling raised borrowing costs for the government by $1.3 billion in 2011 and noted that the delay would also raise costs in later years. The Bipartisan Policy Center extended the GAO's estimates and found that the delay raised borrowing costs by $18.9 billion over ten years.[13]

2013 debt ceiling crisis

Following the increase in the debt ceiling to $16.394 trillion in 2011,[14] the United States again reached the debt ceiling on December 31, 2012 and the Treasury began taking extraordinary measures. The fiscal cliff was resolved with the passage of the American Taxpayer Relief Act of 2012 (ATRA), but no action was taken on the debt ceiling. Following the tax cuts from ATRA, the government needed to raise the debt ceiling by $700 billion to finance operations for the rest of the 2013 fiscal year.[15] Extraordinary measures were expected to be exhausted by February 15.[16] The Treasury has said it is not set up to prioritize payments, and it's not clear that it would be legal to do so. Given this situation, the Treasury would simply delay payments if funds could not be raised through extraordinary measures and the debt ceiling had not been raised. This would put a freeze on 7% of the nation's GDP, a contraction greater than the Great Recession. The economic damage would worsen as recipients of social security benefits, government contracts, and other government payments cut back on spending in response to having the freeze in their revenue.[17]
Under the No Budget, No Pay Act of 2013, both houses of Congress voted to suspend the debt ceiling from February 4, 2013 until May 19, 2013. On May 19, the debt ceiling was raised to approximately $16.699 trillion to accommodate the borrowing done during the suspension period. The Treasury is now using extraordinary measures to avoid a default. Due to the impacts of the American Taxpayer Relief Act of 2012, the Sequester, and a $60 billion payment from Fannie Mae and Freddie Mac that will reach the Treasury on June 28, 2013, extraordinary measures are currently predicted to last until October 17 by the Treasury,[18] but financial firms suggest funds may last a little longer. Jefferies Group says extraordinary measures may last until the end of October while Credit Suisse estimates mid-November.[19]

Reaching the debt limit

Extraordinary measures

The Treasury Department is authorized to issue debt needed to fund government operations (as authorized by each federal budget) up to the debt ceiling, with some small exceptions. When the debt ceiling is reached, Treasury can declare a debt issuance suspension period and utilize "extraordinary measures" to acquire funds to meet federal obligations but which do not require the issue of new debt.
These measures may include suspending investments in the "G-fund" of the individual retirement funds of federal employees, the Thrift Savings Plan. In 2011 these measures were extended to suspending investments in the Civil Service Retirement and Disability Fund (CSRDF), the Postal Service Retiree Health Benefits Fund (Postal Benefits Fund), and the Exchange Stabilization Fund (ESF). In addition to suspending investments, certain CSRDF investments were also redeemed early.[20] In 1985, the Treasury had also exchanged Treasury securities for non-Treasury securities held by the Federal Financing Bank.[21]
However, these amounts are not sufficient to cover government operations.[22] Treasury first used these measures on December 16, 2009, to remain within the debt ceiling, and avoid a government shutdown,[23] and also used it during the debt-ceiling crisis of 2011. However, there are limits to how much can be raised by these measures.

Default on financial obligations

If the debt ceiling is not raised by the time extraordinary measures are exhausted, the government will be unable to pay its financial obligations. The United States has never reached this point. If extraordinary measures are exhausted, the executive branch has the authority to determine which obligations are paid and which are not.[24]
Failure to pay obligations has been characterized as a default; however, some have argued that the executive branch can choose to prioritize interest payments on bonds, which would avoid an immediate, direct default on sovereign debt. During the debt ceiling crisis in 2011, Treasury Secretary Timothy Geitner argued that prioritization of interest payments would not help since government expenditures would have needed to be cut by an unrealistic 40% if the debt ceiling is not raised. Also, a default on non-debt obligations would still undermine American creditworthiness according to at least one rating agency.[25] In 2011, the Treasury suggested that it could not prioritize certain types of expenditures because all expenditures are on equal footing under the law. In this view, when extraordinary measures are exhausted, no payments could be made at all and the United States would be in default on all of its obligations.[26] The CBO notes that prioritization would not avoid the technical definition found in Black's Law Dictionary where default is defined as “the failure to make a payment when due.”[27]


A vote to increase the debt ceiling is usually seen as a formality[by whom?], needed to continue spending that has already been approved previously by Congress and the President. Earlier reports to Congress from experts have repeatedly said that the debt limit is an ineffective means to restrain the growth of debt.[7] James Surowiecki argues that the debt ceiling originally served a useful purpose. When introduced, the President had stronger authority to borrow and spend as he pleased; however, after 1974, Congress began passing comprehensive budget resolutions that specify exactly how much money the government can spend.[8] The apparent redundancy of the debt ceiling has led to suggestions that it should be abolished altogether.[28][29]
A January 2013 poll of a panel of highly regarded economists found that 84% agreed or strongly agreed that, since Congress already approves spending and taxation, "a separate debt ceiling that has to be increased periodically creates unneeded uncertainty and can potentially lead to worse fiscal outcomes." Only one member of the panel, Luigi Zingales, disagreed with the statement.[30]

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