May 31, 2023

President Biden and top congressional leaders will meet on Tuesday to discuss raising the debt ceiling. That raises a lot of questions, including what the debt limit actually is and why the United States has one.

Here’s everything you need to know about the debt limit.

The debt limit is a limit on the total amount of money the United States can borrow to fund the government and meet its financial obligations.

Because the federal government runs budget deficits—meaning it spends more than it takes in through taxes and other revenues—it has to borrow huge sums of money to pay its bills. Those obligations include funding for social safety net programs, interest on the national debt and salaries for members of the armed forces.

Approaching the debt ceiling often leads to calls from lawmakers to cut government spending. But lifting the debt cap doesn’t actually authorize new spending — in fact, it simply allows the United States to spend money on programs already approved by Congress.

The United States officially reached its debt limit on January 19, prompting the Treasury Department to use accounting maneuvers known as extraordinary measures to continue paying the government’s obligations and avoid a default. These measures temporarily curb certain government investments so that the bills can continue to be paid.

Treasury Secretary Janet L. Yellen has warned lawmakers that the United States could run out of money on June 1 if the borrowing ceiling is not raised or suspended.

National debt surpassed $31 trillion for the first time last year. The borrowing ceiling is set at $31.381 trillion.

The Constitution requires Congress to approve government loans. In the early 1900s, the debt limit was set so that the Treasury would not have to ask Congress for permission every time it had to issue debt to pay bills.

During World War I, Congress passed the Second Liberty Bond Act of 1917 to give the Treasury greater flexibility to issue debt and manage federal finances. The debt limit began to take its current form in 1939, when Congress consolidated several limits set for different types of bonds into a single loan limit. At the time, the cap was set at $45 billion.

While the debt limit was created to help government run more smoothly, many policymakers believe it has become more trouble than it’s worth. In 2021, Ms Yellen said she supported the abolition of the debt limit.

If the government exhausted its extraordinary measures and ran out of money, it would not be able to issue new debt. That means it wouldn’t have enough money to pay its bills, including interest and other payments it owes bondholders, military salaries, and retirement benefits.

No one knows exactly what would happen if the United States gets to that point, but the government could default on its debt if it is unable to make the required payments to its bondholders. Economists and Wall Street analysts warn that such a scenario would be economically devastating and could plunge the entire world into a financial crisis.

Several ideas have been put forward to ensure that critical payments are not missed, particularly payments to investors holding US debt. But none of these ideas have ever been tried and it remains unclear whether the government can actually continue to pay its bills if it cannot borrow more money.

One idea that has been proposed is that the Treasury Department would prioritize certain payments to avoid defaulting on the US debt. In that case, the Treasury would first pay the bondholders who own the U.S. Treasury’s debt, even if it delayed other financial obligations such as government salaries or pension payments.

So far, the Treasury seems to have ruled that out as an option. Ms. Yellen has said that such an approach will not prevent debt “default” in the eyes of the markets.

“Treasury systems are all built to pay all our bills when they are due and on time, not to prioritize one form of spending over another,” Ms Yellen told reporters earlier this year.