Three-Minute Legal Talks: Raising the United States’ Debt Ceiling

Once considered routine congressional practice, the passage of new debt ceiling bills in recent years has turned into politicized showdowns between the nation’s two prominent parties. In January 2023, the previous debt ceiling — a cap imposed by Congress on the nation’s annual debt — was reached and the United States Treasury estimated the country would no longer be able to pay its debts beginning June 5.

With just days remaining before the default was imminent, the Senate passed a bill preventing the delinquency, before being sent on to the White House for President Biden’s signature. Prior to the enactment of the new legislation, Congress had raised, extended or revised the debt ceiling 78 times since 1960.

In three minutes, UW Law's Anita Ramasastry, Henry M. Jackson Professor of Law, explains why a debt ceiling is necessary, how it is raised and the ruinous effects that may occur if the United States is ever unable to pay its financial obligations.

Professor Ramasastry has spoken and written about the debt ceiling for over a decade. Read her 2011 Justia article, "Sovereign Default: Putting the United States’ Debt-Ceiling Debate in Context Why Self Help Is the Only Option" for additional background information on the topic.

Read the Transcript

Anita Ramasastry: Hi. I'm Anita Ramasastry. I'm the Henry M. Jackson Professor of Law at the University of Washington.

Three-Minute Legal Talks: What is the debt ceiling?

AR: The debt ceiling is basically just a cap that Congress has imposed on the United States saying this is how much debt that the US can actually incur on an annual basis.

TMLT: Why does Congress need to periodically raise it?

AR: Every year, Congress needs to spend money on everything from paying out Social Security entitlements to the military. And often there's a budget shortfall, just like for any of us as we manage our budget, there's a gap. How do you fill the gap? You borrow money. And this happens in the form of the US government, for example, selling treasury bonds to other people, or investors or governments. So, we need to keep periodically raising it because as our country changes, right — and we've had more wars, we've had all kinds of things — expenditures increase. So, we need to actually raise the amount of money that we need to borrow in order to fill those budget shortfalls.

TMLT: What did it take to get the debt ceiling raised in June 2023?

AR: Debt has become — or the debt ceiling — highly politicized over the past few years. Previously, we would just routinely increase the debt ceiling without there being much political theater, but now it becomes this sort of showdown over we need to be, you know, have more fiscal discipline. And so as we really are right down to the wire, had to negotiate a compromise between the two parties. And at the last minute, right, we all have a sigh of relief, but we raised it. Or what we did is we suspended it until 2025, meaning that we can make it through an election cycle without having to sort of repeat this again.

TMLT: Can it be raised without congressional approval?

AR: So, the power to deal with expenditures, right, under the Constitution rests with Congress, as does the power to issue debt. This is the only part of government that can authorize borrowing.

TMLT: What were the potential effects if the debt ceiling was not raised?

AR: We would be in default, right, we wouldn't be able to pay our obligations. And that means that there would be borrowers, right, who were expecting interest payments or repayment on existing debt, or Social Security, retirees, right, who were saying we need our payments, and we wouldn't have enough to do that. Or even the military, right, that we wouldn't be able to deal with our current obligations. That's step one.

The worst thing is just that in the future, if we don't have enough money to fill budget shortfalls, it will get harder and more difficult to raise money, that this is the bigger problem. If we default, our credit rating goes down in the open market. And that means that we would actually have to offer even more interest, right, to get people to borrow from us. And there's always the risk that we would no longer be seen as secure. We no longer honor our debt. So, investors, right, large investors, like governments will go elsewhere.

TMLT: Has the US ever defaulted on its debt?

AR: The US has not defaulted on its debts, right? So, we've what we've seen is, I think, shockwaves through the markets. During the Obama administration, we went through another one of these, sort of, kind of dramas about the debt ceiling and whether or not it would be raised. And during that time, Moody's, which is a credit rating agency, downgraded the United States from a triple A to I think a double A plus. When that happened, there were, sort of, short term implications in terms of, sort of, US borrowing. What was going to happen? Thankfully, that was very short term,

TMLT: Who owns the largest share of the nation's debt?

AR: So, our largest debtors actually turn out to be Japan, China and the United Kingdom. Japan actually has, I think, as of early 2023, $1.1 trillion in debt with the US.