Debt Ceiling: History and Overview

  • Congress last acted on the debt limit in November 2015 and suspended it until March 2017 – the debt limit is currently at $19.8 trillion.
  • The Treasury Department has asked that Congress raise the debt limit as soon as possible, although Treasury can continue to pay the government’s bills until September 29.
  • Treasury has been using extraordinary measures since March, when the debt limit went back into effect, to push back the deadline for congressional action.

History of the Debt Limit

Article I, Section 8 of the Constitution gives Congress the power “To borrow Money on the credit of the United States.” At first, Congress authorized each debt issuance, often for a specific purpose. For example, a 1902 law authorized debt issuance for construction of the Panama Canal. This ad hoc debt authorization scheme proved too difficult to maintain, and in 1939 Congress established the debt limit. This provided blanket authorization for debt issuance by the federal government as long as the limit was not breached.

Recent debt limit bills passed by Congress have suspended the limit for a period of time instead of raising it by a specific amount. Under this process, the debt limit does not apply for a set period of time and then goes back into effect after the suspension period is over. Then the previous limit is raised by the amount of debt that was accumulated during the suspension period. Since 1978, the debt limit has been raised or suspended 56 times.

Recent Debt Limit Increases

Debt Increases

The costs of Delaying Action on the Debt Limit

The Government Accountability Office has said delays in raising or suspending the debt limit increase the federal government’s borrowing costs because they create uncertainty in the market. During the 2011 debt limit debate, GAO estimates that borrowing costs increased by $1.3 billion in fiscal year 2011. This does not include increased costs in future years. The 2013 debt limit debate increased borrowing costs far less: between $38 million and $70 million.

Federal Debt Since 1940

Debt Since 1940

Secretary Mnuchin’s “Super powers”

Treasury Secretary Steven Mnuchin likes to say that he has super powers. Treasury has taken steps – both routine and extraordinary – to push off the date by which Congress must raise or suspend the debt limit. Some of these measures prevent Treasury from incurring more debt, while others actually lower the debt temporarily. The Congressional Budget Office estimates that these measures will be exhausted by October.

Routine Methods

Use cash balances. Treasury maintains cash balances with the Federal Reserve and can draw on these to pay obligations that would otherwise be financed with new borrowing. However, it must maintain an adequate balance in the Federal Reserve account because the Fed is legally prohibited from loaning the Treasury funds in the event of an overdraft.

Issue cash management bills. Cash management bills are Treasury’s method of borrowing cash on the open market for very short periods, usually just a few days at a time. When close to the debt limit, Treasury can use CM bills in a two-step process that favors short-term borrowing over long-term borrowing. First, Treasury either reduces the overall amount it seeks to borrow via long-term securities auctions, or it actually delays those auctions by a few days or weeks. Second, it replaces the lost borrowing with CM bills. Because this strategy involves altering regularly scheduled securities auctions and borrowing less money over a shorter time, GAO has said that it likely increases the long-term cost of borrowing money.

Extraordinary Actions

Suspend G-Fund investments. The Thrift Savings Plan, a federal employee retirement program, invests a portion of employee and employer contributions in Treasury securities through what it calls the G Fund. Treasury can suspend this investment when close to the debt limit. This action ensures that no new debt is incurred in this program until after the debt limit is increased. After the limit is raised, Treasury is legally obligated to repay lost interest on these uninvested funds.

Suspension and disinvestment of CSRDF investments. The Civil Service Retirement and Disability Fund is a trust fund for federal employee retirement that invests in Treasury securities. Once the debt limit has been reached, Treasury can declare a “debt issuance suspension period” that allows Treasury to take two separate actions: (1) suspend new CSRDF investments in Treasury securities; and (2) disinvest some Treasury securities held by the CSRDF. By law, the treatment of investments in the CSRDF must be duplicated for investments to the Postal Service Retiree Health Benefits Fund.

Suspend issuance of SLGS securities and savings bonds. Established in 1972, State and Local Government Series securities are offered by Treasury to help state and local governments invest their bond proceeds. This Treasury action does not actually lower the debt subject to the limit. Since SLGS securities can be issued any day that a state or local government would like to purchase them, suspending their issuance temporarily halts Treasury borrowing in this particular program until after the debt limit is raised.

Suspend ESF investments. The Exchange Stabilization Fund holds several types of assets, one of which is U.S. dollars. ESF often invests its excess dollars in Treasury securities. By suspending ESF investments, Treasury prevents another program from increasing the debt subject to the limit.

Exchange FFB debt for debt subject to the limit. The Federal Financing Bank essentially acts as the financing agency for many federal departments and agencies that incur debt or issue loan guarantees. Up to $15 billion in FFB debt is not subject to the statutory debt limit. Treasury has the authority to swap some debt subject to the limit in exchange for FFB debt. This action actually lowers overall debt subject to the limit.

Other methods outside of Treasury’s authority. Congressional action is required to allow any additional borrowing if all Treasury options have been exhausted. For example, Congress once passed a measure that allowed the March 1996 Social Security benefits to be paid with borrowing that was temporarily designated as not subject to the debt limit.