What is the debt ceiling and what happens if we reach it?

Question

Over the past few years, there has been debate in congress as to whether or not to raise the debt ceiling.

My question is simple(the answer to it might not be):

What Is the debt ceiling, under what circumstances does it come into play, and what happens if we reach it?

I've heard multiple explanations.

• Some explanations suggest that reaching the debt ceiling means that the US government won't pay it's employees.
• Some explanations suggest that reaching the debt ceiling means that the US government won't repay it's loans.
• Some explanations suggest that reaching the debt ceiling means that the US government will not pay for programs that it has already budgeted for.

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Some have also said that the debt ceiling legislation is unconstitutional according to section 4 of the 14th amendment. Is this the case?

Section 4 of the 14th amendment:

The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned. But neither the United States nor any State shall assume or pay any debt or obligation incurred in aid of insurrection or rebellion against the United States, or any claim for the loss or emancipation of any slave; but all such debts, obligations and claims shall be held illegal and void.

Answer 1

The debt ceiling is the largest amount of the outstanding debt the US is allowed to have.

Reaching the debt ceiling severely impacts the US Treasury cash-flow options, and the result is that it can default on some of the obligations. This is similar to any other entity that has assets, liabilities, revenues and debts. You may have $1M in assets and $10 in liabilities, but your assets are non-liquid and your liabilities are due. You have $0 cash to pay the $10, so no matter how many assets you have - you're bankrupt.

The US government borrows cash to pay current liabilities on the account of the future revenue stream. So if it cannot borrow (after reaching the debt ceiling), it will have only to rely on the revenue stream, which is not steady enough (or just enough, if there's a budget deficit) to cover the current liabilities. Hence - default.

As to what exactly happens, it depends on the treasury's decision on what to default. They may default on payroll obligations, or on debt repayment obligations, or on other stuff, at their choosing. All of the three possibilities (and other) you mentioned are possible.

As to the Constitution - basically the concept of debt ceiling potentially violates the Constitution as it limits the ability of the government to repay its debt. But it appears that both the executive branch (the President) and the legislative branch (the Congress) don't want the judicial branch (the Supreme Court) to rule on this as it will limit the influence of one on the other, which they don't want to happen. Congress wants the ability to make threats re the debt ceiling and is not interested in the Supreme Court declaring it as unconstitutional, and the President wants the ability to threaten the Congress with ignoring the debt ceiling based on the Constitution, thus is not interested in the Supreme Court declaring it as constitutional.

Generally all the US debt is based on the Government spending, which in turn is based on the laws of Congress. So the debt ceiling is basically a way of Congress to say "We told you to pay for X, but we only allow you to spend Y, and if Y is not enough for X - we don't care".

Answer 2

To answer your question directly, the debt ceiling really doesn't determine which priorities will be funded or not funded, so we cannot say with certainty which of the options you list would happen were the debt limit to be breached.

The debt limit is merely the statutory limit (not a Constitutional requirement, but one created by Congress) on the amount of money the Treasury Department can borrow. It in no way authorizes additional spending, it just enables the Treasury Department to physically have enough cash on hand to pay all the bills (for services already rendered) when they come due. In these cases, the commitment to pay the money was made at some point in the past, on credit, the requested services were performed, and now the bill is due.

Additionally, Treasury is constantly collecting revenues throughout the year, so the government would never reach a point of zero cash on hand. The issue is that the amount of cash on hand on a given day would be less than the total due. It is then up to the Secretary of the Treasury to decide which bills to pay and which to ignore. In all likelihood, he would choose to pay the interest on the debt, bond holders and other secured creditors first in order to minimize the overall effect on our credit rating and economy. This makes the second bullet in your question the least likely, but that is entirely up to the discretion of the Secretary of the Treasury in the end.

The Constitutional question is one for the Supreme Court to rule on, but it is important to note that the clause in question was a provision added during Reconstruction as states rejoined the Union with significant debts from financing the civil war. It was an attempt by Congress (at a time when the United States credit rating was still being established on the world stage) to assure other countries that the money they loaned to the now defunct Confederate States of America would be honored by the United States of America and paid on time and in full. As such, its relation to the debt ceiling (which originated after) has never been tested.

Answer 3

About a hundred years ago, our nation was engaged in World War I, and needed to simplify how the government funded its responsibilities. For the Treasury to be able to fund debts incurred from obligations already legislated by Congress without additional votes from Congress every time money was to be released, the debt ceiling was created.

The government website describes the debt ceiling best: “Indeed, the debt limit does not authorize new spending commitments; it simply allows the government to finance existing legal obligations that Congresses and presidents of both parties have approved in the past.” (http://www.treasury.gov/)

Answer 4

Here's my understanding of it.

When the Government can't pay all of its expenses from just tax revenue, they borrow money to pay those expenses.

The Government borrows money to pay for the Military, Medicare, to pay salaries of government employees, and it even borrows money to pay back people who it borrowed from. It's similar to how a citizen would use one credit card to pay off another.

When the debt ceiling gets reached, the government would no longer be able to borrow money to pay for all of its expenses. (Salaries, contractors, Medicare, etc.)

And that is why reaching the debt ceiling results in a failure to pay bills, or a default.

US Treasury Debt Limit page.

Answer 5

The current debt ceiling is $14,294,000,000,000 according to 31 USC 3101.

The debt ceiling could be extended (as under 31 U.S. Code § 3101A), but I think it's too late for that to be done by the President under the current law. Otherwise, net government borrowing is unauthorized. In simple terms, it would force the federal government to live within its means.

The federal government's total annual revenues are estimated to be $3.863 trillion for 2021. That's a lot of means, but not enough to go on spending more.

A more precise terminology for the consequences of not extending the debt limit would be "austerity measures." These refer to economic policies implemented by governments to reduce government spending (or increase revenues) in order to reduce public debt and/or to shrink the budget deficit. This century, for example, the UK has had to implement such measures.

The US has had its own recent brushes with enforcing austerity, such as in 2013. The exact mechanism was different, but it's similar.