The Debt Limit

The Debt Limit

Updated September 15, 2023
The Debt Limit
Overview
postpone a binding debt limit, but such measures do not
prevent a binding debt limit indefinitely. Some have
The debt limit places a statutory constraint on the amount of
suggested that the Fourteenth Amendment may grant the
money that Treasury may borrow to fund federal
President authority to ignore the statutory debt limit.
operations. The statutory debt limit is currently suspended
Previous Administrations and many representatives of the
through January 1, 2025. Congress may debate the merits of
legal community have rejected that argument as an
various debt limit modifications in advance of the debt
limit’s reinstatemen
alternative to debt limit legislation.
t. This In Focus provides background
information and discusses recent legislative activity.
Inaction or Delayed Action: Potential
More information on the debt limit can be found in CRS
Consequences
Report R41633, Reaching the Debt Limit: Background and
The combination of a binding debt limit and continued
Potential Effects on Government Operations; CRS Report
budget deficits would leave Treasury with conflicting
R43389, The Debt Limit Since 2011; CRS Report R45011,
directives. As with any borrower, the government is obliged
Clearing the Air on the Debt Limit: Platinum Coins, the
to pay its bills, and yet a binding debt limit would prevent
Fourteenth Amendment, and More; and CRS Report
Treasury from doing so in a timely fashion. Possible
R44383, Deficits, Debt, and the Economy: An Introduction.
consequences of a binding debt limit include, but are not
Rationale and Role of the Debt Limit
limited to, the following:
• reduced ability of Treasury to borrow funds on
The Constitution grants Congress the “power of the purse,”
advantageous terms, thereby further increasing federal
which allows Congress to restrict the amount of federal
debt;
debt. Under current law, Congress exercises this power
through the federal debt limit, which is codified at 31
• substantial negative outcomes in global economies and
U.S.C. §3101. Debt subject to limit is more than 99% of
financial markets caused by anticipated default on
total federal debt, and includes debt held by the public
Treasury securities or failure to meet other legal
(which is used to finance budget deficits) and debt issued to
obligations;
federal government accounts (which is used to meet federal
• acquisition of interest penalties from delay on certain
obligations).
federal payments and transfers; and
Federal debt increases when total expenditures exceed total
• downgrades of U.S. credit ratings, which could
receipts (producing a budget deficit). Expansion of the
negatively affect capital markets.
federal lending portfolio, through programs like college
student loans, also increases federal debt levels. Periods of
Possible economic and fiscal consequences of the debt limit
sustained debt increases bring debt levels near the debt
are not confined to scenarios where the debt limit is
limit. CBO’s May 2023 baseline projected that the debt
binding. Protracted deliberation over raising the debt limit
subject to limit will be $41.5 trillion at the end of FY2028
may also affect the U.S. financial outlook if it changes
and $52.4 trillion by the end of FY2033; debt held by the
household and business behavior. Some research suggests
public was forecast to equal $34.9 trillion and $46.7 trillion
that debate over the debt limit in August 2011 reduced
in those respective years.
economic expansion in the second half of that year.
The federal debt limit may be viewed as a check to ensure
that recent revenue and expenditure trends meet the
“Because the debt ceiling impasse contributed to the
approval of Congress. However, the federal collection and
financial market disruptions, reduced confidence and
spending decisions affecting debt levels may have been
increased uncertainty, the economic expansion [in
agreed to by Congress and the Administration well in
2011] was no doubt weaker than it otherwise would
advance of debt limit deliberations. Some past debt limit
have been.”—U.S. Treasury, The Potential
legislation has linked debt limit increases with fiscal policy
Macroeconomic Effect of Debt Ceiling Brinkmanship,
proposals such as budget enforcement measures.
October 2013.
Options for Congress
Increasing the Debt Limit
When debt levels approach the statutory debt limit,
Congress can choose to (1) leave the debt limit in place; (2)
Increasing the debt limit to accommodate further borrowing
increase the debt limit to allow for further federal
allows federal operations to continue as they otherwise
borrowing; or (3) temporarily suspend or abolish the debt
would have. Increasing the debt limit reduces the likelihood
limit. Maintaining the current debt limit could lead
of experiencing potential consequences associated with a
Treasury to implement “extraordinary measures” to
binding and near-binding debt limit.
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link to page 2
The Debt Limit
Larger increases in the debt limit allow more time to enact
intragovernmental debt. Although nominal debt levels have
changes that adjust budgetary trends, but could reduce the
steadily risen in the postwar period, debt measured as a
debt limit’s effect on budgetary discussions if policymakers
percentage of GDP (real debt) declined precipitously for
feel less constrained by the new debt limit level. Smaller
several decades following its peak at 118% in 1946,
debt limit increases potentially offer a greater role for the
reaching 32% in 1981. Real debt has increased in the recent
debt limit legislation in budgetary policy discussions, but
decades. At the end of FY2022, total debt subject to the
may lead to more frequent debt limit activity.
limit was 123% of GDP and publicly held debt was 97% of
GDP. The remaining 26% of GDP in debt was
“Extraordinary Measures” and Debt Limit
intragovernmental debt.
Suspension
Figure 1. Federal Debt Subject to Limit as a
Invoking Treasury’s authority to use “extraordinary
Percentage of GDP, FY1940-FY2022
measures” to stay under the debt limit and temporarily
suspending the debt limit both postpone when Congress
must act on debt limit legislation. The authority for using
such “extraordinary measures,” which include suspensions
and delays of some debt sales and auctions,
underinvestment and disinvestment of certain government
funds, and exchange of debt securities for debt not subject
to the debt limit, rests with the Treasury Secretary.
Invocation of “extraordinary measures” has delayed
required action on the debt limit by periods ranging from a
few weeks to several months. Temporary suspensions delay
the restrictions imposed by the debt limit for a period
determined by corresponding legislation, and have been
used in lieu of increasing the debt limit to a specific dollar
value in recent years.

Past Debt Limit Activity
Source: Office of Management and Budget, Department of the
Treasury and Congressional Budget Office. Figure created by CRS.
The Fiscal Responsibility Act of 2023, which was enacted
Note: Values taken at the end of the fiscal year.
in June 2023 (P.L. 118-5), suspended the debt limit through
January 1, 2025. Under current law, on January 2, 2025, the
Timing Uncertainties with a Binding
debt limit will be reinstated at a level matching the debt
Debt Limit
subject to limit at that time. If action is not taken to prevent
Short-term fluctuations in federal debt levels mean there is
a binding debt limit when the debt limit is reinstated, the
Treasury Secretary may elect to exercise “extraordinary
substantial uncertainty as to when debt levels will meet or
measures” to stay beneath the debt limit.
exceed the statutory debt ceiling. Federal debt levels change
in response to variation in the timing of payments and
Regular legislative modifications to the debt limit have
collection of receipts. This fluctuation is influenced by
been enacted since the aggregate debt limit was first created
changes in the size and timing of incoming and outgoing
in 1917. Congress has approved 103 separate debt limit
Treasury payments, and is relatively insensitive to long-
modifications between the end of World War II and the
term deficit outcomes. Examples include lower debt levels
present to accommodate the changes in federal debt levels.
that follow large income tax receipt collections in March
Debt held by the public has consistently increased in that
and April and higher debt levels caused by interest
time period, except in the period immediately following
payments and the issuance of Treasury securities in the
World War II and between 1998 and 2001 when debt
middle and end of a given month.
declined due to federal budget surpluses.
Uncertainty over when a debt limit could bind can exist
Congress has approved 21 distinct changes to the debt limit
weeks or even days before a projected debt limit event, as
since 2001. Much of the recent increase in the debt is
short-term expenditures and particularly revenues can be
attributable to a rise in debt held by the public. Increases in
difficult to predict on a day-to-day basis. Short-term
spending on old-age and retirement programs, lower tax
surpluses could extend the amount of time “extraordinary
receipts, and federal activities related to the Great
measures” taken by Treasury would delay a binding debt
Recession and in response to the COVID-19 pandemic have
limit, while short-term deficits would have the opposite
all contributed to rising debt levels. Debt held in
effect. Small fluctuations in economic output could also
government accounts has also increased since 2001, as
produce significant shifts in when a debt limit is projected
Social Security payroll tax receipts exceeded payments to
to bind.
beneficiaries for much of that period.
Grant A. Driessen, Specialist in Public Finance
Figure 1 shows the debt subject to the limit as a percentage
of GDP from 1940 to 2022, along with how that debt was
IF10292
divided between debt held by the public and

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The Debt Limit

Disclaimer
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