The United States debt ceiling refers to the maximum amount of money the federal government can borrow in order to fulfil its existing legal obligations. As Kavan Choksi Japan mentions, much like how people are able to borrow only up to a specific limit with a credit card, the federal government can only borrow only the amount allowed by the debt ceiling. The debt ceiling is also known as the debt limit.
Kavan Choksi Japan offers a general overview of the United States debt ceiling
The debt ceiling is among the key yardsticks used for measuring the state of the finances of the country’s economy. If the nation is closer to its debt ceiling, it either shows that they have low revenue production and requires more funds to accommodate improvement or that the country might be taking up more than it can handle. This may impact Americans as in order to pay off the debts, the government may choose to increase taxes or set up policies that can reduce purchasing power and lower the living standard.
Raising the debt ceiling implies to the Congress increasing the amount of money the federal government can borrow for the purpose of meeting its financial obligations, which invariably enables a larger national debt. For instance, in December 2021, Congress increased the debt ceiling by $2.5 trillion to a limit of $31.4 trillion. This is just one of the examples of several times the Congress has acted to increase, revise the definition of and extend the debt ceiling since 1960. Any changes to the debt ceiling necessitate majority approval by both the chambers of Congress. It is quite a complex issue that involves careful negotiation and consideration.
In addition to increasing the debt ceiling, the Congress may even opt to suspend it for a particular period of time, which removes the limit. As this suspension comes to an end, the Congress tends to increase the debt ceiling to accommodate the borrowing that has taken place. Such an approach was part of the Fiscal Responsibility Act of 2023, which suspended the debt ceiling until January 2025.
As Kavan Choksi Japan points out, increasing the debt ceiling implies that the government shall continue to fulfil its promises, but it also means that the United States shall continue to borrow more money. This may weaken the value of the U.S. dollar. The government borrows money from marketable securities like Treasury bonds, bills and notes when the national debt is below the debt ceiling. As the government reaches the debt ceiling, it may choose to take “extraordinary measures” for a limited time, which includes borrowing from fund programs or services. However, when these measures get exhausted, the U.S. will default on its debt if Congress does not increase or suspend the debt ceiling.
In case the U.S. federal government defaults on its debt, it is quite likely to off a domino effect, and impact the economy, the livelihoods of Americans as well as global financial stability. After all, U.S. Treasury securities are seen as a benchmark for reliability. They contribute to the status and value of the U.S. dollar as the world’s reserve currency. A default may cause investors to sell U.S. Treasury bonds, potentially weakening the dollar.
