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Updated March 17, 2021
The Debt Limit
Overview
The debt limit places a s tatutory 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 federalborrowing at thatpoint.
Congress may debate the merits of various debt limit
modifications in advance ofthatdate or later if Treasury
implements extraordinary measures to prevent a binding
debt limit after reinstatement. This In Focus provides
background information and dis cusses recent legislative
activity.
More information on the debt limit can be found in CRS
Report R41633, Reaching the DebtLimit: Backgroundand
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 ofthe 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 subjectto limit is more than 99% of
total federaldebt, and includes debt held by thepublic
(which is used to finance budgetdeficits) anddebtissued to
federal government accounts (which is used to meet federal
obligations).
Federal debt increases when total expenditures exceed total
receipts (producing a budget deficit). Expansionofthe
federal lending portfolio, through programs like college
studentloans, also increases federal debt levels. Periods of
sustained debtincreases bring debtlevels near the debt
limit. CBO's February 2021 baseline projected that the debt
subject to limit will be $33.6 trillion at the end of FY2026
and $40.0 trillion by the end of FY2031; debt held by the
public is forecasted to equal $27.6 trillion and $35.3 trillion
in thoserespective years.
The federaldebt 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 havebeen agreed to by
Congress and the Administration wellin advance of debt
limit deliberations. Some past debt limit legislation has
linked debt limit increases with fiscalpolicy proposals such
as budget enforcement meas ures.
Options for Congress
When debt levels approach the statutory debt limit,
Congres s can choose to: (1) leave the debt limit in place;
(2) increase the debt limit to allow for further federal
borrowing; (3) maintain the currentdebt limit and require
the implementation ofextraordinary measures that will
postpone (but not prevent) a binding debt limit; or
(4) temporarily suspend or abolish the debt limit. Some
have suggested that theFourteenth Amendment may grant
the President authority to ignore the statutory debtlimit.
Previous Administrations and many representatives of the
legalcommunity have rejected that argument as an
alternative to debt limit legislation.
Inaction or Delayed Action: Potential
Consequences
The combination of a binding debtlimit 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 fromdoing 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;
* substantialnegative outcomes in global economies and
financial markets caus ed by anticipated default on
Treasury securities or failure to meet other legal
obligations;
* acquisition ofinterestpenalties fromdelay on certain
federalpayments and transfers; and
* downgrades ofU.S. credit ratings, which could
negatively impact capital markets.
Possible economic and fiscal consequences of the debtlimit
are not confinedto scenarios where the debt limit is
binding. Protracted deliberation over rais ing the debtlimit
may also affect the U.S. financialoutlook ifit 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
20 I I ] 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 debtlimit to accommodate further borrowing
allows federal operations to continue as they otherwise
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