The debt limit or the debt ceiling the total amount of money that the United States government is allowed to borrow to meet its existing financial obligations. These obligations include tax refunds, interest on national debt, military salaries, as well as Social Security and Medicare benefits. As per Kavan Choksi, the debt limit does not essentially authorize new spending. Rather, it enables the government to finance existing legal obligations to pay for past spending. As the government reaches the debt ceiling it might take “extraordinary measures” for a limited span of time. This can involve borrowing from fund programs or services.

Kavan Choksi briefly discusses the United States debt ceiling

Debt ceiling works quite like a credit card with a spending limit for the government. It is the maximum sum of money the government of the United States is allowed to borrow to pay for all the things that the taxpayers have already spent money on. As the debt ceiling is reached, the Congress has to provide a green light to raise it. In a similar manner, people tend to ask their credit card company for a higher limit when their spending outpaces the income.

The debt ceiling has a direct impact on the ability of the United States government to pay its bills. If the government is unable to pay its debt, it may have negative consequences for the financial markets and the economy. The debt ceiling is considered to be among the key yardsticks for measuring the state of the finances in the economy. If the nation is closer to its debt ceiling, it would either show that the country has low revenue production, it is taking up more than it can handle or it requires more funds to accommodate improvement.

Any change in the debt ceiling requires majority approval by both chambers of Congress. It is quite a complex issue that necessities careful negotiation and consideration. When the national debt is below the debt ceiling, the government tends to borrow money from marketable securities like bills, notes and Treasury bonds. The United States borrows money by issuing Treasury securities that are purchased by both domestic and international investors.

Apart from increasing the debt ceiling, the Congress also has the capacity to suspend it for a particular period of time, which removes the limit. As this period of suspension comes to an end, the Congress raises the debt ceiling to accommodate the borrowing that has taken place. Such an approach was part of the Fiscal Responsibility Act of 2023, which suspended the debt ceiling until January 2025. An increase in the debt ceiling means that the government will be able to continue to fulfil its promises. 

As per Kavan Choksi, Congress was required to approve each issuance of debt in a separate piece of legislation before establishing the debt ceiling. The debt ceiling was first enacted in 1917 through the Second Liberty Bond Act with the goal of simplifying the process and enhance borrowing flexibility. It was initially set at $11.5 billion. In the year of 1939, Congress created the first aggregate debt limit that covered almost all government debt and set it at $45 billion, which was about 10 percent above total debt at the time.