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What Is the Debt Ceiling?
What Is the Debt Ceiling?
On July 3, Congress lifted the debt ceiling by $5 trillion, preventing a default.
The government almost ran out of money this year
On Jan. 1, the debt ceiling was reinstated at the current level of debt, which means the U.S. is once again at risk of running out of money to meet said obligations. On Jan. 17, then-Treasury Secretary Janet Yellen said that as of Jan. 21, the Treasury would need to begin taking extraordinary measures so the government can continue to meet its budgetary obligations. Congress must act in order to prevent financial calamity. When the U.S. comes close to hitting the debt ceiling and it isn’t raised, the government won’t be able to pay its bills, which could lead to a default. The U.S. government defaulting on its debt could spell disaster on a national and global scale. Every few years, Republicans and Democrats decide to wage a battle over the debt ceiling. This time around was no exception. The federal government was expected to run out of money sometime between mid-August and September, according to the Congressional Budget Office (CBO). But on July 3 the House passed the budget, which included a measure to lift the debt ceiling by $5 trillion to $41.1 trillion, thereby preventing a default.Default was avoided, but not without consequence
One outcome of Congress’ delayed action on the debt limit in 2025 was a credit downgrade. On May 16, Moody’s Ratings lowered the U.S. credit rating from Aaa to Aa1 — the last of the three major credit rating agencies to do so. The U.S. credit rating is an evaluation of the country’s ability to pay its debts. The credit rating is set by three major credit rating agencies: Fitch Ratings, S&P Global Ratings and Moody’s Investors Service. A credit rating downgrade could make investors less confident in the U.S. government's debt management. That doubt might make them less willing to buy U.S. Treasury securities, which could make it more expensive for the U.S. to borrow. As the government's costs to borrow rise, interest payments on the national debt will grow — and taxpayers will end up footing the bill. Prior to Moody’s downgrade, the U.S. held a perfect credit rating of Aaa since 1917. In a statement regarding the decision, Moody’s explained that its one-notch downgrade reflected the U.S. government’s increase in debt over the last decade — and higher interest payment ratios, which put the U.S. debt at "significantly higher” levels than other countries with top credit ratings. The last time the nation’s credit was downgraded was on Aug. 2, 2023, following a near-default. Fitch Ratings downgraded the U.S. long-term foreign currency issuer default rating (IDR) to “AA+” from “AAA.” The credit ratings agency specifically cited the last-minute agreement to avoid default as a factor in its decision along with multiple other macroeconomic factors. In 2011, the nation’s credit was also downgraded: S&P lowered the U.S.’s rating to AA+ from AAA. It was also as a result of the debt-ceiling negotiations at that time. Here’s where the U.S. credit rating stands with the three credit major credit ratings agencies: • Fitch: AA+ • S&P: AA+ • Moody’s: Aa1 »MORE: What happens if the U.S. can’t pay its bills? ‘Catastrophe’ »MORE:What happens if the U.S. defaults?
What happens if the U.S. defaults ? Defaulting would be very bad at best and catastrophic at worst. The U.S. has defaulted only once, and it was due to a technical glitch in 1979. But it has also come close before: In 2011, negotiations dragged on so long the S&P downgraded the U.S. credit rating, which contributed to volatility in the markets. A default that lasts longer than a few days could result in a financial crisis that reverberates around the world. It could include a sell-off of U.S. debt; money market funds selling out; suspension of federal benefits; increased interest rates on lending products and mortgages; tanking stock markets; delayed tax refunds; and the gross domestic product, or GDP, plummeting. A default would also increase interest rates, tightened credit requirements and accelerated the arrival of a recession. » MORE: What happens if the U.S. can’t pay its bills? ‘Catastrophe’ » MORE:The government almost ran out of money in 2023
In January 2023, the U.S. hit its $31.4 trillion debt ceiling and, after six months of tug-and-war, narrowly avoided a default that would have triggered a financial crisis.Meet MoneyNerd, your weekly news decoder
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Here’s how it went down: The United States hit its $31.381 trillion debt ceiling, or limit, on Jan. 19, 2023. Once that debt limit was reached, the federal government became at risk of default. The Treasury Department began to implement “extraordinary measures” shortly thereafter so the government could continue to meet its legal obligations — already approved by Congress — to fund things like Social Security, Medicare, tax refunds and military salaries. Those extraordinary measures included suspending payments on retirement and health care funds for government employees. On May 1, 2023, the Treasury Department made further measures to fund the government until the X-date — June 1 — when it was projected to run out of money. Those measures included suspending the issuance of State and Local Government Series Treasury securities, which are issued to states and municipalities to help them comply with certain tax rules. These securities count against the debt limit. After months of tense negotiations, President Joe Biden and then-House Speaker Kevin McCarthy reached an agreement: the “Fiscal Responsibility Act of 2023,” signed by Biden on June 3, 2023. The agreement suspended the debt limit until Jan. 1, 2025. Learn more about what was in the deal.