Created by Congress in 1917 under the Second Liberty Bond Act, the debt ceiling, or debt limit, is a restriction imposed by Congress on the amount of outstanding national debt that the federal government can have. The debt ceiling is the amount that the Treasury can borrow to pay the bills that have become due and pay for future investments. Once the debt ceiling is reached, the federal government cannot increase the amount of outstanding debt, losing the ability to pay bills and fund programs and services.1 The current debt of the U.S. Government is $31 trillion and counting; however, it’s important to understand that the last time the U.S. government was not in debt was in 1837, which is the only time that a developed nation was without debt.2
To provide some perspective on the debt, it's important to understand the total magnitude of the economy concerning the productivity and revenue side of the U.S. The overall market value of goods and services produced by labor and property supplied by U.S. residents, the Gross National Product (GNP), is over $23 trillion annually.
With this perspective, we return to the national debt, which is the amount of money the federal government has borrowed to cover the outstanding balance of expenses it has incurred over time. Not unlike a consumer who may incur expenses exceeding their income, leading to debt and the need to borrow through loans or credit cards. However, unlike a consumer, the U.S. Government doesn’t resort to loans or credit cards, instead, the Government borrows money by selling marketable securities such as Treasury bonds, bills, notes, floating rate notes, and Treasury inflation-protected securities (TIPS). The tally of the debt is the accumulation of this “borrowing” along with associated interest owed to the investors who purchased these securities.
Over time, the cost of the ongoing deficit causes the overall debt to grow. In this way, the national debt is similar to an individual using a credit card for purchases and not paying off the full balance each month. The cost of purchases exceeding the amount paid off represents a deficit, while accumulated deficits over time represents a person’s overall debt.3 Importantly, raising the debt ceiling is not a license for the government to spend flagrantly, or to spend more than has been previously approved. Rather, raising the ceiling allows the government to pay for the obligations that have already been approved.
In fact, the national debt has never been reduced. Instead, it has increased under every presidential administration since Herbert Hoover, a total of at least 90 times in the 20th century. With each increase, bipartisan support delivered the necessary approval to allow the government to pay its obligations and importantly, to maintain its strong credit rating.
Just as the economy continues to grow, so too does the debt. So, what’s the conflict about now? The current conflict is focused on a proposal from Congress that raising the debt ceiling should be combined with cuts across a multitude of areas. Historically, the debt ceiling has been addressed as a stand-alone issue, and appropriations were addressed separately. But, in the last couple decades, the country’s debt level has risen considerably and there is not enough revenue to cover all the spending. Hopefully both sides will negotiate and reach an acceptable agreement so that the country does not default on its debt.
As always, Ciccarelli Advisory Services is here to help you. If you have any questions about the debt ceiling and the current situation, please reach out to your advisor.
[1] https://www.whitehouse.gov/cea/written-materials/2021/10/06/the-debt-ceiling-an-explainer/
[2] https://teachinghistory.org/history-content/ask-a-historian/23559#:~:text=As%20a%20result%2C%20the%20U.S.,major%20country%20was%20without%20debt.&text=Jackson%20and%20his%20followers%20believed,in%20establishing%20a%20free%20republic.
[3] https://fiscaldata.treasury.gov/americas-finance-guide/national-debt/