What Is the Debt Ceiling?

What Is the Debt Ceiling?

By Charles Joseph | Editor, Financial Affairs
Reviewed by Corey Michael | Senior Financial Analyst

The debt ceiling is a limit set by the United States Congress on the total amount that the federal government is authorized to borrow to meet its existing legal obligations. Basically, it is the cap on the amount of debt the government can accumulate. This can include social security and Medicare benefits, military salaries, tax refunds, interest on the national debt, and others.

According to the U.S. Department of the Treasury, the debt limit does not authorize new spending commitments, but allows the government to finance existing legal obligations. If the ceiling is not increased, the government would default on its legal obligations – an event that has never occurred before.

Related Questions

1. What happens if the debt ceiling is not increased?

If the debt ceiling is not increased, it would lead to the U.S. defaulting on its debt for the first time in its history. A default could impact the country in a number of ways, such as increasing borrowing costs, lowering the dollar’s value, and potentially sparking a financial crisis.

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2. Who decides the debt ceiling?

The Congress is the one who sets the debt ceiling. The U.S. Secretary of the Treasury, along with the President, typically initiates the process of adjusting the debt limit. However, the final decision rests with the House of Representatives and the Senate.

3. Can the debt ceiling be eliminated?

Yes, theoretically the debt ceiling could be eliminated by legislation. Eliminating the debt ceiling would mean that the Treasury could issue any amount of debt to pay for spending that Congress has already authorized. But politically, this is unlikely to happen in practice.

4. How often is the debt ceiling raised?

There’s no set schedule for raising the debt ceiling. It’s raised whenever the debt approaches the existing ceiling, and there’s no other feasible way to continue government operations. Since 1960, Congress has acted over 78 times to permanently raise, temporarily extend, or revise the definition of the debt limit.

5. Does the debt ceiling impact financial markets?

Uncertainty about whether the limit will be raised can negatively impact financial markets. If investors believe there’s a risk the government will default on its debt, they could demand higher interest rates or stop buying U.S. Treasury securities. This could make borrowing more expensive and contribute to financial instability.