MONEYSENSE  08.23

The Debt Ceiling

By Ray DiBartolomeo

In the United States the debt ceiling or debt limit is a legislative limit on the amount of national debt that can be incurred by the U.S. Treasury, thus limiting how much money the federal government may pay by borrowing more money, on the debt it already borrowed.[1] The debt ceiling was created under the Second Liberty Bond Act of 1917 and is also known as the debt limit or statutory debt limit.[2] The debt ceiling is an aggregate figure that applies to gross debt, which includes debt in the hands of the public and intra-government accounts. The debt ceiling is the maximum amount of money that the United States can borrow cumulatively by issuing bonds.[3]

If U.S. government national debt levels bump up against the ceiling, then the Treasury Department must resort to other extraordinary measures to pay government obligations and expenditures until the ceiling is raised again.[4] The debt ceiling has been raised or suspended numerous times over the years to avoid the worst-case scenario: a default by the U.S. government on its debt.[5]

This chart shows the debt ceiling in the United States from 1981 to 2023 (in trillion U.S. dollars)

The Federal Budget

The process of setting the debt ceiling is separate and distinct from the United States budget process, and raising the debt ceiling neither directly increases nor decreases the budget deficit, and vice versa.[6] The Government Accountability Office explains, “the debt limit does not control or limit the ability of the federal government to run deficits or incur obligations[7]. Rather, it is a limit on the ability to pay obligations already incurred.”[8]

The President formulates a federal budget every year, which Congress must pass, sometimes with amendments, in a concurrent resolution, which does not require the President’s signature and is not binding.[9] The budget details projected tax collections and expenditures and, therefore, specifies the estimated amount of borrowing the government would have to do in that fiscal year.[10] As of January 2023 Treasury Secretary Janet Yellen supported legislation to abolish the debt limit, which President Biden has ruled out.[11]

At Ironcrest Capital Management, we strive to make sure that everyone we work with has a strong understanding of their investments. Having a good approach and focus on the most important factors before investing is key. Our goal is to help you make the right decisions. If your current investing approach isn’t working, reach out to us so we can help.

Copyright © 2023 Ironcrest Capital Management – All Rights Reserved. Ray DiBartolomeo is Pres­ident & Chief Compliance Officer at Ironcrest Capital Management LLC. Ironcrest Capital Man­agement LLC is a Registered Investment Adviser. Advisory services are only offered to clients or prospective clients where Ironcrest Capital Management LLC and its representatives are properly licensed or exempt from licensure. This piece is solely for informational purposes and may not be a complete description of financial planning services offered. If you have questions about our services or the content discussed herein, please contact us. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. Any indices referenced for comparison are unmanaged, do not incur fees and expenses and cannot be invested in directly. Past performance is no guarantee of future results. No advice may be rendered by Ironcrest Capital Management LLC unless a client service agreement is in place.

REFERENCES 1.The Debt Limit: History and Recent Increases, October 2013, p 4. 2.Writer, Christina Pazzanese Harvard Staff (May 15, 2023). “Laurence Tribe explains how 14th Amendment can help Biden avoid default”. Harvard Gazette. Retrieved May 31, 2023. 3.Swan, Betsy Woodruff (May 14, 2023). “How the Supreme Court might view the debt limit fight”. POLITICO. Retrieved May 31, 2023. 4.Charles, Jacob D. (December 27, 2013). “The Debt Limit and the Constitution: How the Fourteenth Amendment Forbids Fiscal Obstructionism”. Duke Law Journal. 62. 5. Hazan, Joshua (December 5, 2013). “Unconstitutional Debt Ceilings”. Georgetown Law Journal. Rochester, NY. SSRN 2441308. 6. Lofgren, Mike (October 7, 2021). “Opinion | Biden Can End Debt-Ceiling Sabotage Once and for All”. The New York Times. ISSN 0362-4331. Retrieved January 20, 2023. 7. Potential Macroeconomic Impact of Debt Ceiling Brinkmanship. U.S. Department of the Treasury, 2013. 8. Government Accountability Office (February 22, 2011). “Debt Limit: Delays Create Debt Management Challenges and Increase Uncertainty in the Treasury Market”. 9. “Monthly Statement of the Public Debt of the United States” (PDF). United States Treasury Department. December 31, 2012. Retrieved January 8, 2013. 10. Debt Limit: Delays Create Debt Management Challenges and Increase Uncertainty in the Treasury Market (Report). Government Accountability Office. February 22, 2011. GAO-11-203. Retrieved January 25, 2023. 11.Rappeport, Alan (January 17, 2023). “How Close Is the U.S. to Hitting the Debt Ceiling? How Bad Would That Be?”. The New York Times. ISSN 0362-4331. Retrieved January 18, 2023.