What Is a Statutory Debt Limit?
The statutory debt limit often referred to as the debt ceiling, was the limit set by Congress to the amount of debt that the U.S. government can take on. It also includes interest payments on existing debt. Once the government reaches the statutory debt limit, it cannot take on new obligations.
- The statutory debt limit was a legal limit to the total amount that the U.S. Treasury was authorized to borrow on behalf of the taxpayers.?
- The first statutory debt limit was enacted in 1939, effectively transferring the power to borrow on the public credit, from Congress to the Treasury.??
- The statutory debt limit places a nominal constraint on the Treasury’s authority to go into debt, though Congress has routinely raised the limit over the years to accommodate growth spending and budget deficits.?
- Since 2013, Congress has repeatedly suspended the limit, giving the Treasury unlimited borrowing authority, with the current suspension set to run through August 2021 when it is to be set to match the federal debt.??
Understanding the Statutory Debt Limit
Under the U.S. Constitution, Congress has the power to borrow money. Prior to 1939, this meant that Congress would pass legislation authorizing the Treasury to issue specific amounts of bonds to raise funds for purposes specified in the legislation.
However, other than these specified amounts of earmarked borrowing, the Treasury was not authorized to borrow money on its own authority, and the U.S. government did not maintain a large revolving debt burden as a normal means of financing ongoing general spending, such as for paying for public services, government salaries, entitlements like Medicare, and tax refunds.
In 1939, Congress passed the Public Debt Act, which, along with subsequent amendments, delegated Congress's power to borrow money to the Treasury as long as the total consolidated federal debt stayed under the statutory debt limit set by the Act.?? This was a radical break from previous policy, effectively transferring by statute the Constitutionally enumerated power to borrow from the legislative branch to the executive branch of government.
Still, only the U.S. Congress has the authority to raise the statutory debt limit, which it has done more or less routinely though not without occasional contention. Raising the statutory debt limit has occurred 78 times since 1960. Raising the threshold has taken several different forms, such as redefining the debt limit, allowing a temporary extension to the ceiling and permanently raising the limit. The debt limit has been raised 49 times under Republican presidents and 29 times under Democratic presidents.??
Though some politicians known as deficit hawks, along with many citizens, disapprove of raising the debt limit, Congress has regularly raised the ceiling to avoid defaulting on already committed government payments.
Opponents of fiscal discipline typically argue that refusing to raise the debt limit would lead to debt default by the Treasury and would be catastrophic for the U.S. economy. They claim that those living on Social Security would not receive their monthly payments, members of the military would go unpaid, large segments of the U.S. economy would experience great upheaval, and an unprecedented national economic crisis would ensue.?
This tension has led to several episodes when budget negotiations between fiscal conservatives and other factions in government have broken down, forcing so-called government shutdowns by delaying the Treasury’s ability to continually expand the federal debt.?? During these episodes, government agencies are usually required to restrict some spending or temporarily suspend some operations.
This leads to what has become known as Washington Monument Syndrome: Government agencies selectively cut back their most popular services so as to cause as much discomfort and outrage among the public as possible, in order to put pressure on lawmakers to take on more public debt.????
The Evolution of the Debt Limit
When Congress opts to raise the debt limit, the Congressional Budget Office (CBO) calculates an “X-date.?? ” X-date refers to the day that the government will likely exhaust its debt extension and need to extend the limit further, assuming that it has not increased its income and paid off debts.
The government gets income through taxes, so raising taxes could be one way to increase revenue to pay off debts. Alternatively, the government may choose to cut spending—restricting the funds it spends on infrastructure, the military, etc. The money saved through these cuts can also help prevent raising the debt ceiling. While raising the debt ceiling during times of acute budget pressures tends to be a bipartisan action, theories on ways to avoid it tend to fall more starkly along partisan lines.
The first statutory debt limit set in the U.S. was at $45 billion in 1939. However, Congress raised the ceiling annually during the duration of World War II. By 1946, the limit had reached $300 billion. Over the following decades, it continued to rise as federal government spending, and deficits grew. In 2013, instead of raising the limit, Congress temporarily suspended it, allowing the Treasury to borrow whatever funds it needs to finance government spending.???
Temporary suspensions of the debt limit have become the new normal in the federal budgetary process. In a 2019 budget deal between Congress and the Trump administration, the debt limit was suspended for two years, allowing the Treasury to borrow without limit during that period and sets the debt limit in 2021 based on whatever the actual debt will be at that point.??
While the 2021 budget deal is set to expire on July 31, 2021, that may change amid the ongoing impact of COVID-19. This practice of temporary, but repeated and ongoing, suspensions effectively has effectively put an end to the debt limit as a constraint on federal borrowing (and spending) for the time being.?