What is the US debt ceiling? | US News

The United States is one of the few countries that places a legal limit on the amount of debt the federal government can accumulate.

Here's what you need to know about the US debt ceiling.

What is the debt ceiling?

The debt ceiling is the limit on the amount the U.S. government can borrow to pay for services such as Social Security, Medicare, and the military.

Each year, the government collects revenue from taxes and other flows, such as customs duties, but ultimately spends more than it takes in. That leaves the government with a deficit, which has varied between $400 billion and $3 trillion each year in recent years. decade. The deficit left at the end of the year is ultimately added to the country's total debt.

To borrow money, the U.S. Treasury issues securities, such as U.S. government bonds, which it will eventually repay with interest. Once the U.S. government reaches its debt limit, the Treasury can no longer issue securities, stopping a key flow of money to the federal government.

Congress is responsible for setting the debt ceiling, which currently stands at $31.4 trillion. The debt ceiling has been raised 78 times since 1960, under both Democratic and Republican presidents. Sometimes the ceiling was briefly suspended and then reinstated at a higher limit, essentially a retroactive increase in the debt ceiling.

Area chart of debt limit increasing over time. What happens if the United States defaults?

The United States has never defaulted before, so it's unclear what exactly would happen. It probably won't be good.

Failure to meet government obligations would cause irreparable harm to the U.S. economy, the livelihoods of all Americans and global financial stability, U.S. Treasury Secretary Janet Yellen said in a letter to Congress in January 2023.

Investors would lose confidence in the US dollar, leading to a rapid weakening of the economy. Job cuts would be imminent and the American federal government would not have the means to maintain all of its services. Mortgage rates would likely skyrocket, causing the housing market to crash.

Why is US debt so high?

The U.S. debt increases when the government spends more money or when its revenue decreases.

Area chart of total U.S. government debt increasing over time

Throughout its history, the United States has been in debt to some extent. But the debt really started to rise in the 1980s, after Ronald Reagan's huge tax cuts. Without as much tax revenue, the government has had to borrow more money to spend.

During the 1990s, the end of the Cold War allowed the government to reduce defense spending and a booming economy led to increased tax revenues. But then, in the early 2000s, the dot-com bubble burst, leading to a recession. George W. Bush cut taxes twice, in 2001 and 2003, and then U.S. military campaigns in Iraq and Afghanistan increased spending by nearly $6 trillion over the course of the war.

When the Great Recession of 2008 began, the government had to increase spending to bail out banks and increase social services as the unemployment rate reached 10%.

When the unemployment rate returned to pre-recession levels in 2017, a major tax cut was passed under Trump. The debt increased by $7.8 trillion while he was in office.

Bar chart of changes in U.S. government spending over time

And then the Covid-19 pandemic hit. The US government passed a series of stimulus bills to offset the worst impacts of the pandemic, which ultimately totaled $5 trillion.

What are the main contributors to federal government spending?

The largest share of U.S. government spending is on mandatory programs, such as Social Security, Medicaid, and Medicare, which account for nearly half of the overall annual budget. Military spending represents the largest share of discretionary spending, at 12% of the budget. Other large items include spending on education, job training, and services and benefits for U.S. veterans.

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