The US Debt Ceiling

By Andy Blocker

Washington has become quite adept at manufacturing crises in recent years. Indeed, this fall, both political parties have been engaged in brinksmanship toward another self-generated catastrophe — this time concerning the looming debt ceiling deadline. But what is the debt ceiling anyway, and why has it become such a political cudgel? Let’s take a quick look by answering three key questions.

What is the debt ceiling?

The United States has incurred debt since its inception, starting with the debt accumulated during the Revolutionary War. And while the public debt grew in the early years of the country, it was reduced to zero in 1835 under the presidency of Andrew Jackson and remained relatively tame for some time except for times of war(1) — especially the Civil War, World War I, and World War II. Generally speaking, Congress would approve each issuance of new debt concomitant with legislation that sought to incur the debt, and the concept of a hard ceiling on debt was not considered necessary.

However, in 1939, Congress for the first time established an aggregate upper limit for outstanding public debt. According to the Congressional Research Service, “The statutory debt limit applies to almost all federal debt. The limit applies to federal debt held by the public (that is, debt held outside the federal government itself) and to federal debt held by the government's own accounts. Federal trust funds, such as Social Security, Medicare, Transportation, and Civil Service Retirement accounts, hold most of this internally held debt.”(2) According the Budget Counsel Reference Directory, “approximately 0.5% of total debt is excluded from debt limit coverage.”(3)

While the rationale for a debt limit (or debt ceiling) has ebbed and flowed over time, the direction of the debt ceiling has only moved in one way (up).

Government historical debt outstanding: 1991-2021

Source: Treasury Department as of September 2021

There has been recent debate about what exactly is the purpose of the debt ceiling — for example, whether it is intended to pay bills incurred by previous Congressional actions or to accommodate future spending, regardless of whether those bills were anticipated or not. The answer is that the debt ceiling is designed to incorporate both forms of spending. The US Treasury receives revenue and makes expenditures with any deficit funded by issuing debt. In Q3 2021, for instance, the US Treasury brought in $6.7 trillion and spent $8.8 trillion.(4) The securities issued to support that $2.1 trillion deficit count against the debt ceiling, which currently is set at $28.4 trillion.(5)

There are two ways to incur additional debt without violating the hard cap or triggering a default: raise the debt ceiling or suspend the debt ceiling. While an increase in the debt ceiling is relatively straightforward (Congress picks a dollar amount), a popular option in recent years has been to simply suspend the debt ceiling. This mechanism allows Congress to vote to take on an unlimited amount of debt for a specific period of time with the ceiling effectively being raised to whatever the total amount is at the time the suspension expires. The political benefit of suspension is obvious, as members of Congress can avoid attack ads referencing a vote to increase the debt by tens or hundreds of billions of dollars.

This fall, we found ourselves in a situation in which a 50-50 Senate was deadlocked over increasing the debt limit. Senate Republican Leader Mitch McConnell (R-Kentucky) argued that Democrats should lift the debt ceiling on their own due to Democrats’ “transformational spending through unprecedented use of the party-line reconciliation process” — a reference to the trillions of dollars in spending through the party line-enacted American Recovery Act and the imminent Build Back Better Act. Democrats argued that the debt ceiling covers past bipartisan spending, including bipartisan initiatives to respond to the coronavirus pandemic and the recently passed bipartisan infrastructure bill.

Has raising the ceiling always been so contentious?

Since World War II, the debt ceiling has been raised or suspended more than 98 times.(6) As a result, the United States has never defaulted on its obligations.

History of raising the debt ceiling by the president and political party control of Congress

The chart outlines the instances of passing an increase in the debt limit.

Source: Peterson Foundation

However, this well-established history of successful debt ceiling increases has been put to the test over the past 10 to 15 years, as both political parties seek to maximize any potential or perceived leverage. What was formerly seen as a perfunctory exercise has at times turned into political brinksmanship.

There have also been a myriad of complicated procedural and political issues making the current debt limit debates more complicated than in the past, including the potential use of (and precedent set by) reconciliation to increase the debt limit on a partisan basis, and the procedural limitations and political ramifications of setting a date for a debt suspension rather than a monetary amount.

What is the potential path forward?

2021 proved to be no exception to the new era of brinksmanship over the debt ceiling. A default was averted in October when McConnell agreed to support a short-term extension, ostensibly to give Democrats more time to include a longer-term fix as part of the reconciliation process they are using to advance President Joe Biden’s Build Back Better plan. Reconciliation is the preference of Republicans because it would allow the government to stand behind its obligations with exclusively Democratic support at a 50-vote threshold.

Following the short-term debt ceiling lift in October 2021, the Treasury had set Dec. 15 as the next targeted deadline for action on the debt limit. With the holidays approaching, the brinksmanship of October subsided, as Leaders McConnell and Chuck Schumer (D-New York) struck a deal to lift the debt limit with a convoluted two-step process where Republicans would help Democrats raise the debt ceiling without having to vote for it. The House (Dec. 7) and Senate (Dec. 9) first passed a bill (with Republican support) that set up a one-time, expedited procedure to allow the Senate to raise the debt limit with just 51 votes (instead of the normal 60-vote requirement) on a one-time basis. Then on Dec. 14 both the House and Senate passed the actual $2.5 trillion debt ceiling increase (without any Republican support), which Biden signed on Dec. 15. Disaster averted.?

While this fall’s debt limit stalemate has found a temporary resolution, we must turn our attention to the next X date for when the debt limit is reached. This next deadline, most likely in 2023 based on the $2.5 trillion increase, may be reached in a much different political environment than we find ourselves in today. Variables include Biden’s plans for a second term, the influence of former President Donald Trump, economic conditions, and the power concentration in the conservative/populist and liberal/progressive wings of the political parties. One scenario may involve the House of Representatives and/or Senate flipping party control in the 2022 midterm elections. Should that happen, we may see the next debt limit deadline used as leverage to enact fiscal reforms — setting up a battle similar to 2011, which led to the sequestration restraints of the Budget Control Act of 2011.

1 Source: History.com, “The U.S. national debt reaches $0 for the first time,” August 29, 2019.

2 Source: Congressional Research Service, December 2021

3 Source: Budget Counsel Reference Directory

4 Source: Bureau of Economic Analysis, Government Receipts and Expenditures, December 2021

5 Source: The White House, “The Debt Ceiling: An Explainer,” Oct. 6, 2021

6 Source: Congressional Research Service, December 2011

Important information

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Header image: Philipp / Adobe Stock

The opinions expressed are those of the speakers and are based on current market conditions as of December 15, 2021, and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals.