The Debt Ceiling — An Explainer

Updated August 2, 2023
The White House negotiated a deal with Republicans in June to raise the debt ceiling and curb spending, averting default. Information on this deal can be found below. Lawmakers now prepare to implement the deal as they negotiate the upcoming budget.

What is the debt ceiling?

The debt ceiling is like the nation’s credit limit. It’s the maximum amount the government can borrow from the Treasury to pay its bills. The government needs to borrow money sometimes to pay for programs people rely on like Social Security or Medicare; support workers, families, and businesses during periods of economic decline; make long-term investments in our nation’s infrastructure and security; or respond to crises like natural disasters. When resources are limited due to economic downturns or tax cuts that aren’t paid for, the need to borrow more to honor existing commitments increases.

Congress sets the debt limit and can adjust it at any time. If spending exceeds the debt limit, the government won’t be able to pay its bills. The resulting default would cause serious harm to all Americans as well as catastrophic economic upheaval across the nation and around the world.

Why is it important?

If the government can’t pay its bills, all Americans will suffer:

  • Social Security, Medicare, and veterans’ benefit payments disrupted
  • Paychecks disrupted for federal employees — including those who serve in the military, homeland security, border patrol, postal service, prisons, national parks, aviation, food safety, and disease control
  • Tax refunds won’t be issued
  • Programs that pay for health care, child care, school meals, agricultural subsidies, and student grants disrupted
  • Safety nets that address hunger and poverty disrupted

If the government defaults on its debt, the US economy will experience severe long-term damage:

  • When the government doesn’t pay people and businesses for the goods and services they provide, those people and businesses then struggle to pay bills of their own. The ripple effect could result in millions of lost jobs, upended lives, and plunge the economy into recession.
  • Defaulting will result in a downgrade of our nation’s credit rating, which means investments in the US are considered risky. A lower credit rating will lead to higher interest rates, higher interest rates lead to higher borrowing costs, and higher borrowing costs mean we’ll likely have to pay more through higher taxes or significantly cut back on spending for programs that are important to people, businesses, and communities.

US debt default would seriously harm global economic security:

  • The US dollar is the global standard of investment security because we have never defaulted on our debt. The full faith and credit of the US government is foundational to the economic wellbeing of this country, its trading partners, and the world at large. A US default would significantly diminish our standing in the global economy.
  • A default would likely cause global credit markets to freeze up and stock markets to plunge, which in turn could lead to mass layoffs and a global recession at a time when the world economy is still weakened from the impact of the pandemic.

How would a default impact Mainers?*

*Approximate numbers

What’s in the Biden-McCarthy deal?

With default just days away, White House negotiators struck a deal with Republicans that would raise the debt ceiling and curtail future spending. The new bill is now signed into law. Here’s what it does and how it compares to the Republican plan passed in the House last month:

  • Raises the debt limit for two years, and beyond the next presidential election. The previous Republican plan lifted it for less than one year.
  • Caps non-defense spending at current levels for 2024 and allows a 1 percent increase in 2025, reducing spending by an estimated $1.5 trillion over the next decade. The previous Republican plan called for $3.6 trillion in non-defense cuts over the next decade, which could have resulted in program reductions as high as 59 percent by 2033.
  • Changes food stamp eligibility through 2030 by imposing new work requirements for childless, able-bodied adults ages 50-55 (work requirements already exist for people under age 50), while eliminating work requirements for all veterans, people experiencing homelessness, and young adults transitioning from foster care. The Center for Budget and Policy Priorities (CBPP) estimates almost 750,000 older adults will be subject to the new requirements and 225,000 of those are likely to lose their food assistance, including 2,000 in Maine. CBPP also estimates that the plan’s new exemptions will result in 78,000 more people overall gaining access to food assistance. The previous Republican plan imposed wide-ranging restrictions for most aid programs, including Medicaid.
  • Tightens work requirements for Temporary Assistance for Needy Families (TANF) program by reducing the allowable share of exempted food stamp recipients in regions with high unemployment. It also requires states to prove that a certain percentage of adults in families receiving TANF are working or participating in approved activities. Despite research showing that work requirements are ineffective, these policies were also a prime feature of the previous Republican plan.
  • Reduces new IRS tax enforcement funding by $21.4 billion – which amounts to a quarter of the new funding approved in last year’s Inflation Reduction Act, aimed at modernizing service and raising revenue by cracking down on tax cheats. This provision of the deal will actually increase the deficit. Estimates from the nonpartisan Congressional Budget Office (CBO) suggest the cuts could end up costing more than $40 billion in unclaimed tax revenue over the decade and increase the deficit by $19 billion. The previous Republican plan called for a rollback of nearly all new IRS funding included in the Inflation Reduction Act, which would have increased the deficit by an estimated $114 billion over the decade.
  • Repurposes $28 billion in unobligated COVID-19 relief funding, but uses some of it to fund vaccine and treatment development and delivery to the uninsured and retains funding marked for housing assistance, the Indian Health Service and veterans’ medical care. The previous Republican plan called for clawing back all unspent funds.
  • Speeds environmental reviews of certain energy projects. The previous Republican plan called for a rollback of almost all new clean energy tax credits and subsidies found in the Inflation Reduction Act.

What about revenue?

The Biden-McCarthy deal does not include any provisions for raising new revenue or asking the wealthiest people and corporations to pay their share. Congress should prioritize securing the billions of dollars wealthy corporations avoid paying in taxes instead of slashing the vital programs and services our communities need to thrive. It should also focus on adding to the wealth of our nation by investing in our workforce and building the high-paying and high-quality jobs American workers deserve. Here’s how:

  • Crack down on tax cheats. The US is losing $1 trillion in unpaid taxes every year, primarily the result of evasion by the wealthy people and corporations. The wealthiest 1 percent of Americans hide about 20 percent of their income from taxation.
  • Close offshore tax havens. Many wealthy people and corporations hide their income in foreign tax havens, estimated to cost the Treasury as much as $123 billion
  • Stop giving the ultra-rich tax breaks they don’t need. Tax cuts enacted during the Trump administration largely benefitted millionaires and billionaires. Allowing them to expire will prevent $2.2 trillion from being added to the debt over the next 10 years.
  • Create a new tax bracket for the ultra-rich and tax their unearned income. No billionaire should pay a lower tax rate than schoolteachers and fire fighters. But right now, many do. Imposing a 20 percent minimum tax on people who earn over $100 million and taxing investment income would raise $360 billion over the next decade and make our tax code fairer for middle class working families.
  • Stop giving wealthy corporations tax breaks they don’t need. In 2020, 55 of America’s largest corporations paid zero in federal taxes while they benefitted from the infrastructure and educated workforce that working families’ tax dollars pay for. This unnecessary corporate welfare costs the government about $180 billion each year.
  • Give working families the tools they need. Workers need good pay, flexibility, and respect on the job. That means affordable child care and higher education, paid leave, and wages that keep pace with the cost of living. Increasing earned wealth doesn’t just boost government revenue – it also supports local economies and family stability in communities across the nation.

Will fighting over the debt ceiling reduce the debt?

No. The debt reflects spending commitments the government made in the past and which it is obligated to pay. In fact, 88 percent of the current debt comes from legislation enacted under previous administrations, including costly tax cuts that weren’t offset and bipartisan pandemic relief legislation. The time to reduce the debt and ensure the nation spends within its means is during the budgeting process, not afterwards.

Is all the talk of default just political theater?

Just the threat of default, along with a climate of extreme partisan division and Bush-era revenue reductions resulted in the first downgrading of the US credit rating in 2011. That downgrade alone caused mortgage and interest rates to rise and made consumer loans more expensive for months afterwards. And the severe, across-the-board cuts that came out of the political stalemate resulted in years of increased hardship for millions of Americans, lower economic growth, higher unemployment, and poor outcomes in education, public health, and scientific and medical research. With another budget showdown (and potential government shutdown) looming, a similar downgrade came from a second rating agency on August 2, with political brinksmanship and rising deficits named as the cause of concern. With stakes this high, even theater is dangerous.

How is a default different from a government shutdown?

Government shutdowns occur when annual funding for operations expires before Congress can renew it. Federal shutdowns harm millions of American lives and livelihoods and depress economic activity nationwide. But unlike shutdowns, which typically stabilize within a year, a default would likely cause a serious recession that could take decades to recover from.

Did you know…

  • The debt limit has been raised 78 times since 1960 — 29 times under Democratic presidents and 49 times under Republican presidents.
  • During Ronald Reagan’s tenure, Congress raised the debt limit no less than 18 times. The 1980s are still the decade with the biggest percentage increase in the debt and the debt limit, triggered in part by tax cuts.
  • Under Trump, the debt ceiling was raised by 40 percent. About one quarter of the current debt was incurred during the Trump presidency.
  • Congress suspended the debt ceiling during the pandemic, and then reset it in 2021 at $31.4 trillion.
  • Even with a recent boost in 2023, funding for non-defense programs outside of veterans’ medical care is about 9 percent below 2010 levels when adjusted for inflation and population growth.
  • The last time the US budget ran a surplus was 2001.

Dive deeper

Debt Ceiling Agreement’s SNAP Changes Would Increase Hunger and Poverty for Many Older Low-Income People; New Exemptions Would Help Some Others | Center on Budget and Policy Priorities

Debt-Limit Deal’s Provision to Let Tax Cheats Off the Hook Will Increase the Deficit – ITEP

4 ways around a debt ceiling crisis — and why they might not work | NPR

7 debt limit proposals from House Republicans | The Washington Post

Life After Default | The White House Council of Economic Advisers

House Republicans’ Pledge to Cut Appropriated Programs to 2022 Level Would Have Severe Effects, Particularly for Non-Defense Programs | CBPP

Donald Trump Built a National Debt So Big (Even Before the Pandemic) That It’ll Weigh Down the Economy for Years | ProPublica

Debt ceiling 2023: What we can learn from past showdowns like the one in 2011 | Vox

9 key moments that pushed the national debt higher in last two decades | Washington Post