The United States government spends trillions of dollars each year on programmes, defence, infrastructure, and interest payments. That said, the government does not always collect enough money through taxes to cover all these expenses. To make up the difference, it borrows money.
This borrowing is controlled by a rule known as the debt ceiling. Although it may sound technical, the debt ceiling plays an important role in the global economy and affects taxpayers both in the US and around the world.
What Is the National Debt?
The national debt is the total amount of money the US federal government has borrowed throughout its history and has not yet repaid.
The US national debt is nearly $39 trillion, as per government data. This figure includes money borrowed to fund government programmes, respond to economic crises, and cover yearly budget deficits.
A budget deficit occurs when the government spends more money than it collects through taxes and other revenue sources. When this happens, the government must borrow to cover the gap. Over time, these yearly deficits accumulate and become part of the national debt.
The US government mainly borrows money by issuing Treasury securities, such as Treasury bills, notes, and bonds. Investors, banks, pension funds, and foreign governments buy these securities. In return, the US government promises to repay the money with interest.
What Is the Debt Ceiling?
The debt ceiling, also known as the debt limit, is the legal maximum amount of money that the US government is allowed to borrow.
Congress created the debt ceiling in 1917 during the First World War through the Second Liberty Bond Act. The aim was to simplify government borrowing during wartime while maintaining congressional oversight of national finances.
Instead of approving each individual loan, Congress established a total borrowing limit. As long as the government stays below that limit, the Treasury Department can continue issuing bonds and raising money.
When the national debt approaches that limit, the government cannot legally borrow more money unless Congress raises or suspends the ceiling.
Why the Government Needs to Borrow
The federal government collects revenue mainly through:
- Income taxes
- Corporate taxes
- Payroll taxes
- Customs duties and other fees
Government spending is significantly larger. Major spending areas include:
- Social Security benefits
- Medicare and Medicaid
- Defence spending
- Interest payments on existing debt
- Infrastructure and public services
Because spending often exceeds revenue, borrowing becomes necessary to pay existing obligations.
Raising the debt ceiling does not authorise new spending, though. It allows the government to pay for spending that Congress has already approved.
What Happens When the Debt Ceiling Is Reached?
When the US government reaches the debt limit, the Treasury Department cannot issue new debt to raise additional funds.
The government must still pay its bills. These include:
- Social Security payments
- Military salaries
- Government contracts
- Interest payments to bondholders
To avoid running out of money immediately, the Treasury uses temporary steps known as “extraordinary measures”.
These measures may include:
- Suspending investments in certain government funds
- Moving money between accounts
- Delaying some internal payments
These actions create limited borrowing space and buy time for Congress to act. They only work for a short period. Eventually, the government will run out of cash if the debt ceiling is not raised or suspended.
What Happens If the US Defaults?
If Congress does not raise the debt ceiling in time, the US government could fail to meet some of its financial obligations. This situation is known as a debt default.
The US has never defaulted on its debt before. Possible effects of a default include:
- Financial Market Turbulence – US Treasury bonds are widely considered among the safest investments in the world. A default would shake investor confidence and cause volatility in financial markets.
- Higher Borrowing Costs – Investors would demand higher interest rates to compensate for increased risk. This would make borrowing more expensive for the US government.
- Economic Slowdown – Economic models suggest that a prolonged default could reduce US economic output and lead to job losses.
- Global Financial Impact – Because the US dollar plays a central role in global finance, a default could disrupt international markets and weaken financial stability worldwide.
How the Debt Ceiling Affects Taxpayers
The debt ceiling debate may appear distant from everyday life, but it affects taxpayers in several ways.
- Higher borrowing costs can increase government expenses. This may influence future taxes or spending decisions.
- Financial instability caused by debt crises can affect stock markets, pensions, and economic growth.
- Government programmes such as Social Security, healthcare, and military salaries depend on the government’s ability to borrow and manage its finances.
Since 1960, the debt ceiling has been changed more than 70 times.