The Debt Ceiling: What Is It and Why It’s Important?

Every year or so, anyone who follows the national news hears about the debt ceiling. Since 1960, Congress has either permanently raised, temporarily extended or revised the definition of the debt ceiling 78 separate times.¹  In recent years, the negotiations have turned into what seems like a high-stakes game of poker between policymakers and escalates into a showdown on Capitol Hill. So, why does the debt ceiling matter?

The debt ceiling, also called the debt limit, is the total amount of money that the United States government is allowed to borrow to meet its existing financial 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. It simply allows the government to finance existing legal obligations to pay for past spending.¹ 

To put it more simply: Imagine you have a credit card with a spending limit. The debt ceiling is a bit like that limit for the government. It's the maximum amount Uncle Sam is allowed to borrow to pay for all the things we've already spent money on—like building roads, funding schools, and keeping the government in working order. Once that ceiling is reached, Congress needs to give the green light to raise it, just like you might ask your credit card company for a higher limit when your spending outpaces your income.

The debt limit directly impacts the government's ability to pay its bills. If the government couldn't pay its debt, it could have negative consequences for the financial markets, the economy and the average person.

For starters, the federal government might struggle to meet its obligations, risking delayed paychecks for federal employees or even disruptions in essential services. Social Security checks, veterans' benefits, and other programs tied to federal spending could all be at risk.

Furthermore, the debt ceiling has a profound effect on the economy at large. If the government hits the ceiling and can't borrow more money, it might default on its payments, sending shockwaves through financial markets. Interest rates could also skyrocket, making it more expensive for you to borrow money for a car or a home.

The debt ceiling isn’t just a wonky, abstract concept. The decisions made in the halls of Congress about the debt limit have a direct impact on your wallet, your job, and the overall well-being of the country. The debt ceiling is the financial safety net that helps keep the economy running.

1. https://home.treasury.gov/policy-issues/financial-markets-financial-institutions-and-fiscal-service/debt-limit

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