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$ a Congressional Research Servic
~ Informing the legislative debate since 1914
The Debt Limit
Overview
The debt limit places a statutory constraint on the amount of
money that Treasury may borrow to fund federal
operations. The debt limit is currently suspended, and
scheduled for reinstatement on August 1, 2021, at a level
precisely accommodating federal borrowing at that point.
Congress may debate the merits of various debt limit
modifications in advance of that date or later if Treasury
implements extraordinary measures to prevent a binding
debt limit after reinstatement. This In Focus provides
background information and discusses recent legislative
activity.
More information on the debt limit can be found in CRS
Report R41633, Reaching the Debt Limit: Background and
Potential Effects on Government Operations, by D. Andrew
Austin et al.; CRS Report R43389, The Debt Limit Since
2011, by D. Andrew Austin; and CRS Report R44383,
Deficits, Debt, and the Economy: An Introduction, by Grant
A. Driessen.
Rationale and Role of the Debt Limit
The Constitution grants Congress the power of the purse,
which allows Congress to restrict the amount of federal
debt. Under current law Congress exercises this power
through the federal debt limit, which is codified at 31
U.S.C. §3101. Debt subject to limit is more than 99% of
total federal debt, and includes debt held by the public
(which is used to finance budget deficits) and debt issued to
federal government accounts (which is used to meet federal
obligations).
Federal debt increases when total expenditures exceed total
receipts (producing a budget deficit). Expansion of the
federal lending portfolio, through programs like college
student loans, also increases federal debt levels. Periods of
sustained debt increases bring debt levels near the debt
limit. CBO's August 2019 baseline projected that the debt
subject to limit will be $28.5 trillion at the end of FY2024
and $34.4 trillion by the end of FY2029; debt held by the
public is forecasted to equal $22.5 trillion and $29.3 trillion
in those respective years.
The federal debt limit acts as a check to ensure that recent
revenue and expenditure trends meet the approval of
Congress. However, the federal collection and spending
decisions affecting debt levels may have been agreed to by
Congress and the Administration well in advance of debt
limit deliberations. Some past debt limit legislation has
linked debt limit increases with fiscal policy proposals such
as budget enforcement measures.
Options for Congress
When debt levels approach the statutory debt limit,
Congress can choose to: (1) leave the debt limit in place;
Updated September 20, 2019
(2) increase the debt limit to allow for further federal
borrowing; (3) maintain the current debt limit and require
the implementation of extraordinary measures that will
postpone (but not prevent) a binding debt limit; or
(4) temporarily suspend or abolish the debt limit. Some
have suggested that the Fourteenth Amendment may grant
the President authority to ignore the statutory debt limit.
Previous Administrations and many representatives of the
legal community have rejected that argument as an
alternative to debt limit legislation.
Inaction or Delayed Action: Potential
Consequences
The combination of a binding debt limit and continued
budget deficits would leave Treasury with conflicting
directives. As with any borrower, the government is obliged
to pay its bills, and yet a binding debt limit would prevent
Treasury from doing so in a timely fashion. Possible
consequences of a binding debt limit include, but are not
limited to, the following:
* reduced ability of Treasury to borrow funds on
advantageous terms, thereby further increasing federal
debt;
* substantial negative outcomes in global economies and
financial markets caused by anticipated default on
Treasury securities or failure to meet other legal
obligations;
* acquisition of interest penalties from delay on certain
federal payments and transfers; and
* downgrades of U.S. credit ratings, which could
negatively impact capital markets.
Possible economic and fiscal consequences of the debt limit
are not confined to scenarios where the debt limit is
binding. Protracted deliberation over raising the debt limit
may also affect the U.S. financial outlook if it changes
household and business behavior. Some research suggests
that debate over the debt limit in August 2011 reduced
economic expansion in the second half of that year.
Because the debt ceiling impasse contributed to the
financial market disruptions, reduced confidence and
increased uncertainty, the economic expansion [in
2011 ] was no doubt weaker than it otherwise would
have been. - U.S. Treasury, The Potential
Macroeconomic Effect of Debt Ceiling Brinkmanship,
October 20 13.
Increasing the Debt Limit
Increasing the debt limit to accommodate further borrowing
allows federal operations to continue as they otherwise
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