Understanding the Debt Ceiling and How It Impacts All of Us

Blog | June 13th, 2023

This year the White House released a statement that the United States was rapidly approaching the “X-date,” or the date when it can no longer pay bills. With that headline in mind, many people question the debt ceiling and how it impacts the citizens.

What Is the Debt Ceiling?

The debt ceiling is the cap on how much money the United States can borrow to fund the government. It often spends more money than it makes from tax revenue, meaning it must borrow to make ends meet.

The government needs money to fund social safety programs, salaries for people serving in the armed forces, and interest on previously-accumulated debt. The last time the United States made enough money to pay all financial obligations was in 2001 when the country had an annual surplus.

If the United States reached the debt ceiling and couldn’t pay bills, it would be a financial crisis. The government couldn’t pay military salaries, tax refunds, and Social Security benefits to citizens. They also wouldn’t be able to pay investors, which could cause a major rift in many international relationships. 

Pros and Cons of the Debt Ceiling

There are many benefits to the government’s debt ceiling.
  • It keeps the country’s finances balanced.
  • It can fund federal operations in times of need.
  • It makes the government efficient at funding social benefits like Medicare and Social Security.

However, the country is in this position because there are also disadvantages to the debt ceiling.
  • It’s easy to raise the limit, encouraging reckless spending.
  • Negatively impacts the country’s credit rating.
  • Lawmakers use financial shutdowns to push through their agendas.

Why Does the United States Have a Debt Limit?

The Constitution ruled that Congress would authorize the government to borrow money to fund itself. The Treasury used to ask Congress for permission to issue debt to pay bills. In the early 20th century, the government created the debt limit to prevent that extra back-and-forth. The Treasury could issue debt up to the debt limit without asking permission.

In 1939, the debt limit was $45 billion. Recently, the government raised the debt ceiling to $31.381 trillion as the country accrued $31 trillion in debt in 2022. 

When the government realizes that it’s approaching its debt limit, it should cut back on spending. Since the United States hit the debt limit on January 19, 2023, the Treasury has tried extraordinary measures to pay for existing programs and obligations. 

Extraordinary measures mean that to meet financial demands, the government stops paying other bills. They may cut payments to state and local governments, civil service retirees, and people getting disability funds. The government will compensate anyone who misses this income when it gets a hold on the debt limit and can move funds around without issue.

The government may use extraordinary measures for a few days or months, depending on how much help they need with the federal budget. The time of year can also impact the duration of extraordinary measures. For example, the beginning of the year brings in more tax income that gives the government extra cash to use to pay bills.

The Debt Ceiling Solution

It looked like the United States would completely exhaust all the Treasury’s extraordinary measures by June 5, 2023. However, at the end of May, President Biden signed the Fiscal Responsibility Act of 2023 to stop the debt trouble.

The government will make major spending cuts, initiating automatic cuts if Congress fails to take action on certain bills. Without this solution, the government would exhaust its financial measures and be unable to issue new debt or pay bills, salaries, and debt interest.

The United States has only defaulted on debt once in its history. In 1979, a bookkeeping error delayed bond payments to investors. At the time, the debt ceiling was only $830 billion, but the government delayed payment on $122 million worth of Treasury bills. They fixed the issue within three weeks, and the Treasury still considers it an error, not a true default on the debt.

Since the government never purposefully defaulted on its debt, it’s difficult to say how this could impact American citizens. However, many people have speculated on the wide-reaching impact.

What Does the Debt Ceiling Mean for Us?

Congress suspended and raised debt limits throughout history without this massive issue, but if lawmakers can’t agree on a solution to the financial problem, it could cause serious economic problems. 

You can think of the government much like many households in the country: they don’t make enough money to pay their bills, so they have to borrow money, cut expenses, or skip paying bills whenever possible.

The fact that the government could default on debt at this point in the nation’s history makes it even more precarious. Many people still haven’t recovered from the pandemic, whether they’re still battling health issues and paying off medical debt or trying to find work that pays a living wage.

The inability to collect military salaries, Social Security income, or receive tax refunds when you’re already in a delicate financial position can have detrimental effects on people at an individual level as well as the country’s economy overall.

The government also puts money toward Medicaid and Medicare, plus nutritional help for families living below the poverty line. People would be unable to eat healthy foods or perhaps even eat at all. The recession would also cause job loss, which would negatively impact household income even more.

Defaulting on debt would tarnish the United States Treasury’s reputation, making it harder to borrow money in the future. As a result, the government would pass these costs onto consumers, who would have higher interest rates on loans, mortgages, and credit cards.

Final Thoughts

While the country is currently safe in terms of the debt ceiling, it’s good to know what that means and how it can impact the citizens. Staying updated on government matters can help you understand the state of the world.

Related: Take Advantage of These Government Programs You Probably Didn’t Know About!