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What Is a Debt Ceiling?

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  • Written By: Bobby R. Goldsmith
  • Edited By: Susan Barwick
  • Last Modified Date: 21 November 2016
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A debt ceiling is a limitation on the debt that an organization can carry forward and is most commonly associated with the budgetary process of the United States federal government. It can, however, be a limit that applies to the finances of any group. The ceiling prevents the legislature, which consists of the Senate and the House of Representatives, from borrowing any funds once the level of debt indicated in the budget reaches the limit. The aim of the debt ceiling is to prevent a government from borrowing too much money and risking insolvency. It is, however, an arbitrary figure, and can be raised at any time through the combined actions of the legislative and executive branches of the federal government.

The US first instituted a debt ceiling during the First World War, when Congress authorized the Treasury to issue Liberty Bonds to fund the war effort. The Treasury would issue the bonds then pay back the bond holders with interest by a specified date. To avoid the accrual of insurmountable debt, Congress limited the total amount the amount of money the federal government could borrow by issuing the bonds. That limit became the formal debt ceiling that the federal government uses to cap overall debt.

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TIn 2011, the debt ceiling is no longer limited to the issuance of government bonds but caps the total level of debt accrued by government spending. This total does not reset at the end of the year but is a rolling arbitrary limit. When the federal government's national debt approaches the debt ceiling, Congress must either pass a budget resolution that reduces spending to a level less than total revenue that will eliminate the deficit, or it must pass an initiative that generates more revenue. Congress can also pass a bill that increases the debt limit, though this option is often politically volatile.

To increase the debt ceiling, both the Senate and the House of Representatives must draft resolutions that raise it, specifying what the limit will be after passage. The drafts must pass through the committee process of each congressional chamber on a majority vote. Each draft must then pass a full vote on the floor of each chamber. If the bill passes, the House and Senate versions must be reconciled in a joint committee of both chambers. The President of the United State must then approve or veto the debt limit increase. If the bill is vetoed, however, the Congress can override the veto and approve the increase if two-thirds of each house vote for it.

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