.png){kind=small}
What is the USA Debt Ceiling?
The USA debt ceiling is a legally imposed limit on how much the federal government can borrow to meet its financial obligations. Established in 1917 during World War I, the debt ceiling originally aimed to give the Treasury more flexibility to manage war expenditures while maintaining some congressional oversight.
But here’s the catch: the government consistently spends more money than it takes in through taxes and other revenue. As a result, the Treasury must borrow money to cover the deficit, which pushes up the national debt. This borrowing, however, comes to a halt whenever the debt ceiling is reached unless Congress takes action to either increase or suspend the limit.
The last major action on the debt ceiling took place in June 2023, when Congress suspended it until the start of 2025.
What Happens When the Debt Ceiling Comes Back Into Play?
When the debt ceiling suspension ends—set to happen on January 2, 2025—the Treasury will no longer be allowed to increase borrowing above the limit, which currently stands at over $36 trillion. So, what happens next?
Cash Reserves Come into Play: The Treasury will need to rely on its stockpile of cash, which stood at $831 billion as of late 2023. This reserve can cover government payments for a limited time.
Extraordinary Measures: The Treasury uses “extraordinary measures” to buy more time. These include delaying reinvestment of certain government funds, such as retirement accounts for federal employees. While these are temporary fixes, they’ve become a go-to tactic in past debt-limit standoffs.
X-Date Looms: The so-called X-date is when the Treasury completely runs out of money to meet its obligations. Economists and bond market strategists predict this date could arrive by mid-2025, depending on how fast government cash is spent and tax revenue is collected.
Historical trajectory of the U.S. statutory debt limit from 1993 to 2024, highlighting the suspension in mid-2023 with a planned return in January 2025.
Why Is Eliminating the Debt Ceiling Gaining Traction?
The debt ceiling has long been a political bargaining chip. Opposition parties use it as leverage to negotiate policy changes, often creating high-stakes showdowns that rattle markets and public confidence.
Former President Donald Trump, in a surprising stance, recently called for the complete removal of the debt ceiling, describing it as an unnecessary and disruptive relic of the past. Trump argued that eliminating the limit could simplify fiscal negotiations, particularly as he pushes to extend his 2017 tax cuts, which are set to expire at the end of 2025.
Would Congress Agree to Scrap the Debt Ceiling?
Getting Congress to agree on abolishing the debt ceiling is no easy feat. Many Republicans see the limit as essential for enforcing fiscal discipline and controlling runaway spending. Meanwhile, some Democrats argue that the debt ceiling is more trouble than it’s worth, with progressive leaders like Senator Elizabeth Warren referring to it as “political hostage-taking.”
One potential compromise was floated by Representative Brendan Boyle, who proposed legislation that would allow the Treasury Secretary to unilaterally raise the ceiling, subject to congressional approval or veto. Outgoing Treasury Secretary Janet Yellen expressed strong support for such a plan in 2022, calling the regular debt ceiling crises “simply insane.”
What Happens if the U.S. Breaches the Debt Ceiling?
Failing to act before the X-date would force the Treasury to make difficult decisions, including the possibility of prioritizing payments. But this is a scenario no one wants to see. Here’s why:
Global Financial Panic: U.S. Treasury bonds are the backbone of the global financial system. Failing to make payments on these bonds could trigger a financial meltdown worldwide.
Government Shutdowns: Beyond bondholders, the government would face tough choices about paying Social Security recipients, federal employees, veterans, and more.
Credit Rating Cuts: During past debt-limit standoffs, credit-rating agencies like Fitch have downgraded the U.S. credit rating, increasing borrowing costs and damaging fiscal credibility.
What Would Eliminating the Debt Ceiling Accomplish?
Getting rid of the debt ceiling would:
Eliminate periodic disruptions to the bond market, where Treasury bills serve as a cornerstone for global investors and money market funds.
Prevent last-minute political crises that shake consumer and investor confidence.
Allow the Treasury to manage government finances without the looming threat of default.
However, critics worry that without the debt ceiling, there would be less pressure on Congress and the White House to address the growing national debt.
The Bigger Picture: U.S. Fiscal Challenges
Eliminating the debt ceiling doesn’t solve the broader problem of the federal government’s finances. As of 2024:
The annual budget deficit stands at 6.4% of GDP, the highest since the pandemic years.
Rising costs for healthcare, Social Security, and interest payments are driving deficits higher.
The Congressional Budget Office (CBO) predicts deficits will remain above 6% of GDP for the next decade unless significant changes are made to spending and revenue policies.
Meanwhile, Trump’s push to extend his 2017 tax cuts could add trillions of dollars to the debt over the coming decade, further complicating the fiscal outlook.
What’s Next for the Debt Ceiling Debate?
As the debt ceiling suspension nears its expiration, the ball is in Congress’s court. Leaders will need to decide whether to pass new legislation addressing the ceiling or continue with short-term fixes. Treasury officials are expected to issue preliminary estimates on when the X-date could hit, but the exact timeline will depend on tax receipts and spending patterns.
In the meantime, the debate over whether to abolish the debt ceiling altogether will remain a hot topic among lawmakers, economists, and market participants.
FAQs
Q: Why was the debt ceiling created in the first place? The debt ceiling was introduced in 1917 to give the Treasury more flexibility during World War I while maintaining some congressional control over borrowing.
Q: What are extraordinary measures? These are temporary accounting tactics used by the Treasury to free up cash and avoid breaching the debt ceiling.
Q: What happens if the U.S. defaults on its debt? Defaulting would likely trigger a global financial crisis, as U.S. Treasury securities are the benchmark for borrowing costs worldwide.
Q: Could the debt ceiling be abolished? It’s possible but politically challenging. Proponents argue it would reduce fiscal crises, while critics fear it could encourage unchecked spending.