Does Raising the Debt Ceiling increase government spending?
- Answer: No, the debt ceiling does not increase spending. Rather, it is a legal restraint on Treasury’s ability to honor U.S. obligations already incurred.
- Background: The nation’s public debt — which is the accumulated debt of the nation — increases when Congress enacts total spending for a fiscal year that exceeds total revenues, in other words, when Congress deficit spends. When Congress passes spending and tax laws that result in an annual deficit, the U.S. Treasury must borrow sufficient funds to cover the deficit, and this increases the accumulated public debt.
- The statutory limit on the public debt, often called the “Debt Ceiling,” is an artificial legal limit on the Treasury’s ability to borrow the funds necessary to finance annual budget deficits. If Congress passes spending measures that exceed incoming revenues, but prevents the Treasury from borrowing funds to cover the deficit, the nation would default on its legal obligations to domestic and foreign lenders, Social Security and Medicare beneficiaries, Veterans, States and cities, retirees, and all others to whom payments are legally owed. A default has never occurred and would have catastrophic effects on the ability of the U.S. Treasury to issue bonds and the overall stability of global financial markets. The only way to responsibly and effectively hold down federal debt is to reduce federal spending and/or raise federal revenues. Refusing to honor obligations already incurred is dangerous and ineffective.
- Note: The Debt Ceiling roughly approximates Gross Federal Debt–which includes:
- Debt Held by the Public (money borrowed by selling Treasury securities to various buyers including foreign investors, mutual funds, state and local governments, commercial banks, insurance companies and individuals); plus
- Debt Held by Federal Government Accounts, such as the Social Security Trust Funds and various federal retirement trust funds.
- While a lot of political attention is paid to the Gross Federal Debt and the Debt Ceiling due to their symbolism, most economists view Debt Held by the Public as more significant economically than Gross Federal Debt, because Debt Held by the Public reflects the total amount the Federal Government is borrowing from private credit markets–with all the implications that has for available credit.