Federal debt ceiling

The United States debt ceiling or debt limit is a legislative limit on the amount of national debt that can be issued by the US Treasury, thus limiting how much money the federal government may borrow. The debt ceiling is an aggregate figure which applies to the gross debt, which includes debt in the hands of the public and in intra-government accounts. (About 0.5% of debt is not covered by the ceiling.) Because expenditures are authorized by separate legislation, the debt ceiling does not directly limit government deficits. In effect, it can only restrain the Treasury from paying for expenditures and other financial obligations after the limit has been reached, but which have already been approved (in the budget) and appropriated.

When the debt ceiling is actually reached without an increase in the limit having been enacted, Treasury will need to resort to "extraordinary measures" to temporarily finance government expenditures and obligations until a resolution can be reached. The Treasury has never reached the point of exhausting extraordinary measures, resulting in default, although on some occasions, Congress appeared like it would allow a default to take place. If this situation were to occur, it is unclear whether Treasury would be able to prioritize payments on debt to avoid a default on its bond obligations, but it would at least have to default on some of its non-bond payment obligations. A protracted default could trigger a variety of economic problems including a financial crisis, and a decline in output that would put the country into an economic recession.

Management of the United States public debt is an important part of the macroeconomics of the United States economy and finance system, and the debt ceiling is a constraint on the executive's ability to manage the U.S. economy. There is debate, however, on how the U.S. economy should be managed, and whether a debt ceiling is an appropriate mechanism for restraining government spending.

Under Article I Section 8 of the United States Constitution, only Congress can authorize the borrowing of money on the credit of the United States. From the founding of the United States until 1917, Congress directly authorized each individual debt issued. To provide more flexibility to finance the United States' involvement in World War I, Congress modified the method by which it authorized debt in the Second Liberty Bond Act of 1917. Under this Act, Congress established an aggregate limit, or "ceiling," on the total amount of new bonds that could be issued.

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