President-elect Donald Trump’s demand that Congress suspend the debt ceiling as part of ongoing negotiations to prevent a government shutdown has once again put the spotlight on the debt ceiling.
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The federal debt ceiling is once again in the news.
The United States still has some time to reach its debt ceiling, but President-elect Donald Trump’s last-minute demand that Congress suspend the debt ceiling as part of ongoing negotiations aimed at preventing a government shutdown has brought the topic to the forefront again.
Here are four things to know about this eternal political football.
What is the debt limit?
The debt limit is a relic of the First World Warwhen Congress stopped authorizing individual cases of public borrowing and replaced them with general authorization – up to a certain limit.
Since then, Congress has periodically raised – or suspended – this limit, to accommodate increased government borrowing.
Every time lawmakers need to raise the debt ceiling, it’s an opportunity for political demagoguery on financial responsibility.
More recently, this has also been an opportunity for obtain political concessions in exchange for raising the limit, as failure to do so would trigger a potentially disastrous government default.
Why are we talking about this now?
In the latest standoff over the debt ceiling, Congress suspended the ceiling until January 1, 2025.
Although this deadline is now approaching, there is actually no immediate urgency to raise or suspend the debt ceiling. The Treasury Department could buy time by using “extraordinary measures” to continue borrowing money until the middle of next year.
The federal debt topped $36 trillion earlier this month. A billboard in Atlanta displays what this means to every person in the United States.
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Derek White/Getty Images North America
That’s what most people expected until this week, when President-elect suddenly insisted that Congress suspend the debt ceiling for two more years as part of a stopgap spending bill aimed at keeping the government running.
That and other demands from the president-elect torpedoed the spending bill and raised the prospect of a government shutdown this weekend. But the threat of a real government default will still be months away.
What are the political issues?
Neither party likes raising the debt ceiling because it seems to encourage fiscal irresponsibility. And Republicans and Democrats share responsibility for the ocean of red ink in government.
The last time the government ran a surplus, almost a quarter of a century agorevenues represented 19% of GDP while expenditures amounted to 18%. Since then, tax cuts have reduced revenues to 16.5% of GDP while spending has soared to almost 23%.
When a party holds power in Washington, its members usually hold their noses and raise the debt ceiling without drama. In times of divided government, there is more grandstanding and – in some cases – more hostage-taking.
Trump wants the debt ceiling raised now – on President Biden’s watch – before he and his fellow Republicans take full control of the budget – and must therefore take full responsibility for any additional borrowing needed.
Democrats in the Senate and the White House are unlikely to accept this proposal. Congressional forecasters predict that Trump’s promise to extend the 2017 tax cuts will add more than $4 trillion to the debt over the next decade.
Speaker of the House Mike Johnson (R-LA) speaks to reporters outside the chambers of the House of Representatives at the U.S. Capitol in Washington, DC, December 19, 2024.
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Does increasing the debt ceiling encourage more public debt?
The level of government debt depends on decisions made by Congress on taxes and spending, as well as external factors such as the performance of the economy.
If Congress decides to spend more and cut taxes, it will inevitably have to borrow more to make up the difference. Raising the debt ceiling is simply a recognition of these choices and a recognition that the government’s bills must be paid.
Failure to do so is like gorging yourself at a restaurant and then rushing out the door saying your credit card is maxed out.