The national debt of the United States has been a source of contention for many years. This article will explore the complex and often misunderstood concept of the U.S. debt ceiling or limit along with its effects on the economy. We will examine what the debt ceiling is, how it has been used in the past and the implications of a potential breach. We will also discuss the extraordinary measures used by the Treasury Department when the debt ceiling is reached and the consequences of a possible default.
Introduction to U.S. Debit Ceiling
On 19th January 2023, the United States hit its debt limit. Since then talks about Debt ceiling is happening not only around in the US but also across the globe. It is important to understand what is debt ceiling (or limit) why it is important and what is the impact of a breach.
Before going to Debt ceiling it is pertinent to understand what is National Debt first.
What is the national debt?
According to the Treasury of the US, the National Debt is the total amount of outstanding borrowings by the Federal Government over the years (or say nation’s history).
In simple words, it is an accumulation of the borrowings along with associated interest owed/ payments to the investors, who have purchased Government securities. The Nation’s debt grows as the Federal Government’s deficits recur – this is common in most countries across the world.
Why do Federal Government Borrow?
Well, the Federal Government borrows money to pay its bills for its ongoing operations. The Federal Government borrows money when the expenditure cannot be met or funded only by the revenue receipts.
In other words, an amount of money to pay the outstanding balance of expenses incurred over a time by the Federal government. When government expenditure exceeds its revenue then it results in Budget Deficit.
What do the Federal government do to borrow money or how Federal Government borrow money?
U.S. Treasury Department creates securities to sell. The securities which are sold are the debt owed by the Federal Government.
What are the types of Treasury Debt?
The treasury debts are marketable securities like Treasury bills, notes, bonds, Treasury inflation-protected securities (TIPS) and floating rate notes.
The difference lies mainly in the maturity date of these securities, it ranges from a few days to 30 years. Adding to this, how much interest they pay for these securities is also another difference. The U.S. did not have annual surplus since 2001.
What Is the Debt Ceiling or Debt Limit?
A restriction imposed by Congress on the amount of outstanding national debt that Government can have is called Debt Ceiling or Limit.
In other words, the Debt limit or ceiling is an amount that the Treasury can borrow to pay the outstanding bills and also pay for future investments.
When was Debt Ceiling (or Limit) enacted or established?
For each issuance of debt congress was required to approve in a separate piece of legislation – before debt ceiling is enacted. A separate law was first enacted for Debt ceiling in 1917 through Second Liberty Bond Act. The first Debt Ceiling was set at $11.5 billion to simplify the process and enhance flexibility in borrowing.
The first aggregate debt limit covering all government debt was set at $45 billion by Congress in 1939. This is about 10% above the total debt at the time.
What is the Debt Ceiling/Limit?
Over the years, the Debt ceiling is kept on increasing. In the 1980s, the debt ceiling was increased to nearly $3 trillion from $1 trillion. In the 1990s, it was doubled to almost $6 trillion, and in the 2000s it was again doubled to more than $12 trillion.
The debt limit was automatically raised by $900 billion by the Budget Control Act of 2011. This gave the President to increase the limit by an additional $1.2 trillion (total of $2.1 trillion) to $16.39 trillion.
In February 2013, the Debt ceiling was suspended rather than raising it by a specific amount for the seventh time. However, in 2021 the debt limit was increased twice (not suspended), it was formally increased to $31.381 trillion in December 2021.
Why there is a sudden debate about Debt Ceiling/Limit?
On December 2021, the Debt ceiling increase was enacted to sustain the borrowing of the Federal Government until 19th January 2023. With extraordinary measures, according to U.S. Treasury Secretary Yellen, allowing the federal government to pay its obligation in full and on time. This is normally a policy deadline with an “X date” minimum till June.
The Debt ceiling has breached $31.381 trillion (it is $31.456 trillion while writing this article), which means that the U.S. government will not be able to issue any new debt. Using extraordinary measures that provide for shifting certain funds around, like suspending the sale of certain government securities, can help to sustain at these times.
What are the extraordinary measures Treasury use when the Debt Ceiling/Limit is reached?
There are some accounting ways/measures that which Treasury Department uses when the Debt ceiling (or limit) is reached, such ways/measures are called Extraordinary Measures. These measures are used to evade non-payment of the government’s debts.
For example: halted contributions to certain government pension funds, suspend state and local government securities, premature redeem of Treasury bonds held in federal employment retirement savings accounts (this will be later replaced with interest), and borrowed money from money set aside to manage exchange rate fluctuations.
When was the first time Federal Government used this measure and is there any recent happening on the same?
The first time this extraordinary measure was used in 1985. So far, it have been used six times from May 2011 to the end of 2021.
Recently, there was a couple of letters from Treasury Secretary Yellen stating the extraordinary measures. The first letter was dated 19th January, 2023, where it was stated that the Treasury is suspending the debt issuance with respect to the Civil Service Retirement and Disability Fund along with the investments of amount to the Postal Service Retiree Health Funds.
The Second letter was dated 23rd January 2023, Secretary stated that Treasury is suspending the Government Securities Investment Fund (G-fund) to avoid breaching the mandated debt limit, using the extraordinary measures which has been used in the past by the my predecessor. (Letter for Reference)
This counts to seven times between May 2011 and February, 2023.
What are the consequences of default?
There are serious negative economic implications if default or even there is threat of default. While the threat of default will increase the borrowing costs. An actual default may create chaos in both domestic and international markets. It will increase the interest rates and demand for Government Securities will come down or stop – as the investors will no longer will invest in G-Sec considering it as unsafe investment.
The actual default will lead to losing the regular Federal payments for more than tens of millions families with children, veterans and retirees that help them to meet their ends.
A Council of Economic Advisers report stated that in an actual default then the increased unemployment rates would last for two to four years.
Conclusion
This article has presented an overview of the U.S. debt ceiling, its history, and its economic impact. We have explained what are the extraordinary measures that the Treasury Department takes if & when US economy reaches debt ceiling. Along with this we have also explained what are the possible consequences of a potential default. In the second part of this article, will have further explored the US debt ceiling & its ramifications in greater depth.