What is America’s debt ceiling?

AT SOME POINT in October—precisely when is uncertain—America’s federal government will be unable to pay its bills, and may default on its debt. That is not because the country is in a financial crisis or starved of revenue. It is instead due to a toxic combination of America’s dysfunctionally polarised politics and a legal quirk known as the debt ceiling. What is it, and why is it important?

The debt ceiling is the legal cap that Congress sets on the amount that the Treasury can borrow. It does not authorise any new spending; it simply lets the government pay for what Congress has approved. The debt ceiling came into being in 1917; before then, Congress tended to authorise borrowing for specific purposes. But when raising money to support America’s entry into the first world war, Congress granted the Treasury more flexibility, eventually setting a comprehensive debt ceiling in 1935.

For many years, raising or adjusting the debt limit was a pro forma congressional function. Since 1960, it has done so 78 times: 49 times under Republican presidents, and 29 times when a Democrat was in the White House. During Donald Trump’s presidency, a bipartisan congressional majority raised the ceiling three times, and Democrats agreed to a two-year suspension of the ceiling as part of a budget agreement in 2019. That suspension expired in late July; since then, the Treasury has been taking “extraordinary measures”, which included suspending investments in some federal retirement and disability funds, to conserve cash.

This time, the brinkmanship is part of a broader battle over spending. On September 21st Democrats in the House of Representatives passed a bill to lift the debt ceiling, extend government funding through December and pay for relief from recent natural disasters. Senate Republicans say they will not approve an increase, but Democrats want to test that resolve: they believe Republicans will cave rather than cause a default and government shutdown, and they also believe they may be able to pick up a few votes from Republicans representing states hit by hurricanes. Republicans want Democrats to pass the bill on a party-line vote, which is possible with the right sort of parliamentary manoeuvres, and which would let them keep their powder dry and paint Democrats as the party of irresponsible spending (never mind that raising the debt limit simply lets the government pay bills racked up under previous administrations). Which party blinks first remains unclear, but someone will. Provoking a financial crisis and a government shutdown at the same time would be an extraordinary act of self-sabotage.

Source: https://www.economist.com/the-economist-explains/2021/09/21/what-is-americas-debt-ceiling