A debt ceiling limits the amount of debt an organization can carry, often associated with the US federal government. It can be increased through the combined actions of the legislative and executive branches. The limit was first instituted during World War I to limit the total amount of money the federal government could borrow. To raise the debt ceiling, both the Senate and the House of Representatives must draft resolutions raising it, specifying what the limit will be after the passage.
A debt ceiling is a limitation on the debt an organization can carry and is most commonly associated with the US federal government budget process. However, it can be a limit that applies to any group’s finances. The cap prevents the legislature, made up of the Senate and the House of Representatives, from borrowing any funds once the budgeted debt level reaches the cap. The purpose of the debt ceiling is to prevent a government from borrowing too much money and risking default. It is, however, an arbitrary figure and can be increased at any time through the combined actions of the legislative and executive branches of the federal government.
The United States first instituted a debt ceiling during World War I, when Congress authorized the Treasury to issue Liberty Bonds to finance the war effort. The Treasury will issue the bonds and then repay the bondholders with interest by a specified date. To avoid the buildup of insurmountable debt, Congress limited the total amount of money the federal government could borrow by issuing the bonds. That limit has become the formal debt ceiling that the federal government uses to limit overall debt.
In 2011, the debt ceiling is no longer limited to the issuance of government bonds, but limits the total level of debt accrued by public spending. This total does not reset to zero at the end of the year, but is an arbitrary rolling limit. When the federal government’s national debt approaches the debt ceiling, Congress must pass a budget resolution that reduces spending to a level below total revenue that will eliminate the deficit, or it must pass an initiative that generates more revenue. Congress can also pass a bill that raises the debt limit, although this option is often politically volatile.
To raise the debt ceiling, both the Senate and the House of Representatives must draft resolutions raising it, specifying what the limit will be after the passage. Drafts must go through the committee process of each house of Congress by a majority vote. Each draft must then pass a full grade on each chamber floor. If the bill passes, the House and Senate versions must be reconciled in a joint committee of both houses. The US president must then approve or veto the increase in the debt limit. If the bill is vetoed, however, Congress can override the veto and pass the increase if two-thirds of each house votes on it.
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