What is the Debt Ceiling?

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What is the Debt Ceiling?

When the US government doesn’t have enough money to pay its bills, it’s allowed to borrow money to pay for them. But there is a limit to the amount of money it can borrow. This limit is called the Debt Ceiling.

Unfortunately sometimes the amount of money the government needs to borrow to pay its bills is greater than the debt ceiling amount. When this is the case, the US government needs the debt ceiling to be increased so the US government can borrow more money to pay for bills such as paying social security checks, medicare expenses, military salaries and interest on US Treasury bonds.

In order for the debt ceiling to be raised, Congress needs to vote on it. This can be tricky because the debt ceiling was put in place so the government wouldn’t spend too much money and then borrow too much money. When the US government borrows too much money, it goes further and further into debt and the only way it can pay interest on this debt is to cut spending, raise taxes or borrow even more money and go further into debt.

However, if the government doesn’t pay its bills the people and institutions who relied on these payments will be negatively effected. Also, the global markets would most likely crash because the US government is considered the safest, most reliable institution to pay its bills. And finally, it would be more expensive for the US government to borrow money in the future because investors would demand a higher interest rate to lend the US government money.

Remember, the debt ceiling sets the limit on the amount of money the US government can borrow.  However, that limit is often tested.

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