Federal Debt Limit

By on May 18, 2011

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What is the Federal Debt Limit?

Department of the Treasury defines the debt limit as the total amount of money that the United States government is authorized to borrow to meet its existing legal obligations, including Social Security and Medicare benefits, military salaries, interest on the national debt, tax refunds, and other payments. The debt limit does not authorize new spending commitments. The first federal debt limit was set in 1917 at $11.5 billion. The current federal debt limit of $12.394 trillion was set in February 2010. The Treasury estimates that the United States will reach the debt limit some time between 16 May and 2 August 2011.

History of Federal Debt Limit

In 1917, Congress passed the Second Liberty Bond Act, which helped finance the United States’ entry into World War I. By allowing the Treasury to issue long-term Liberty Bonds, which were marketed to the public at large, the federal government held down its interest costs. Debt limit legislation in the following two decades also set separate limits for different categories of debt, such as bills, certificates, and bonds. In 1939, Congress eliminated separate limits and created an aggregate limit covering nearly all public debt. The debt limit was raised to accommodate accumulating costs for World War II in each year from 1941 through 1945, when it was set at $300 billion. After World War II ended, the debt limit was reduced to $275 billion. Because the Korean War was mostly financed by higher taxes rather than by increased debt, the limit remained at $275 billion until 1954. After 1954, the debt limit was reduced twice and increased seven times, until March 1962 when it again reached $300 billion, its level at the end of World War II. Since March 1960, Congress has enacted 78 separate measures that have altered the limit on federal debt. During the 1980s, it increased from less than $1 trillion, to nearly $3 trillion. Over the course of the 1990s it doubled to nearly $6 trillion, and in the 00’s, it doubled again to well over $12 trillion. The current statutory debt limit, $14.294 trillion, was established on February 12, 2010.

Why Debt Limit Needs to be Increased?

The Treasury does not have legal authority to issue any debt above the statutory debt limit. To avert a default on its credit obligations or a shutdown of government operations, occasionally it is necessary to raise the limit. The current economic slowdown led to sharply higher deficits in recent years, which led to a series of debt limit increases. The Housing and Economic Recovery Act of 2008 (H.R. 3221), signed into law on July 30, 2008, included a debt limit increase. The Emergency Economic Stabilization Act of 2008 (H.R. 1424), signed into law on October 3, raised the debt limit again. The debt limit rose a third time in less than a year to $12,104 billion with the passage of the American Recovery and Reinvestment Act of 2009 on February 13, 2009 (ARRA; H.R. 1), which was signed into law on February 17, 2009. H.R. 4314, passed by the House on December 16, 2009, and by the Senate on December 24, raised the debt limit to $12,394 billion when the President signed the measure on December 28. The current debt limit of $14.294 trillion, was established by Congress on February 12, 2010.

What Happens if the U.S. Hits its Debt Limit?

The Department of Treasury can use a variety of “extraordinary measure” to postpone hitting the debt limit. For example, it can prematurely redeem treasury bonds held in federal employee retirement savings plans, halt contributions to government pension funds, or accumulate certain special types of debt that are not subject to the limit. U.S. creditworthiness will be adversely affected causing financial turmoil in the U.S. stock market and with it most of the world markets, putting a halt to any financial recovery. After around 8 weeks, the treasury would have no remaining borrowing authority and the available cash balances would be insufficient to meet federal commitments. If at this stage the Congress fails to increase the debt limit, a broad range of government payments would have to be stopped, including military salaries and retirement benefits, Social Security and Medicare payments, and unemployment compensation.

About Sam

Sam Burgoon is the social media and marketing executive for Credit Season. He has a degree in business administration and marketing and has previously worked for companies like Bank of America and Oracle.Connect with Sam on Google+