What is the debt ceiling?

Federal Government funds its expenditures through taxes and other sources. And, when its expenditure can’t be funded through Federal Revenues alone then Government borrows money. Under such circumstances, US Treasury sells securities. The Maturity date of these securities varies from a few days to 30 years.

What is the debt ceiling?

The US Federal Government can’t borrow funds more than what Congress has authorized. Debt ceiling or Debt Limit is the maximum amount of money the US Federal Government can have outstanding at any point in time.

As on December 16, 2021: the debt ceiling stands at $31.381 trillion.

US Federal Government finances its expenditures on medicare benefits, social security, interest payments, wages, etc. through Federal revenues. In case of a shortfall in revenues, US Federal Government would have to borrow money to fund its obligations. And, it can only borrow for its existing obligations and not for new commitments.

Before the Second Liberty Bond Act of 1917, Congress would approve every bond issued by US Treasury to meet Federal Government legal obligations. But, the Second Liberty Bond Act of 1917 allowed the US Treasury to issue bonds without the need for congressional approval. Instead, it placed a statutory limit (or, debt ceiling/limit) which limited the funds it could borrow.

And, since then debt limit has been revised on the higher side numerous times.

It isn’t possible to exactly predict the time when the outstanding obligations would hit the debt limit. Reason: When the Government spends faster than the revenues it can collect, it leads to an increase in debt. And, it’s tough to forecast the revenue flow.

When the outstanding debt reaches the debt limit, then the debt limit either is suspended for time being or increased. Failure to do so would have an impact on the financial stability of the country.

At this stage, one is right to question the existence of the debt limit itself. At first glance, it may seem it isn’t helpful to have a debt limit. But, the debt limit brings efficiency to Federal Government spending.

In cases where there isn’t a debt limit placed, the Federal Government can borrow an infinite sum. And, doing so would again affect the financial stability. Too much debt also affects the credit rating of the country and this would again raise the cost of debt. It places checks on the amount Federal Government can borrow.

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