The debt ceiling is the limit on the debt that Congress authorizes. The debt ceiling does not authorize debt; it restricts the debt issued by the government, for investments like infrastructure and economic development, beyond a particular amount of money.
When debt is issued, debt ceiling acts as a restriction on the issuer, in this case, the Congress. Without legislation that changes debt ceiling levels or suspending debt ceiling altogether for a period of time, the debt ceiling is simply an obstacle to overcome in order to fund larger-scale spending projects like infrastructure and economic development.
The debt ceiling has become more contentious in recent years because the United States is borrowing more than ever before to finance budgets deficits (when spending exceeds revenue).
Attempts at raising the debt ceiling make it difficult for Congress and other legislators to plan their budgets and make long-term financial decisions.
There is now a battle in Congress about raising the debt ceiling once again. If you ask me, it’s all for show. The ceiling is never rejected. It is always either approved or they suspend the debt ceiling until they can try again later and approve it then.
The Biden administration is warning state and local governments about drastic cuts to Medicaid, food stamps, disaster relief and other federal programs if Congress fails to raise or suspend the debt ceiling soon.
The battle to raise the government’s borrowing limit carries big risks for state and local officials, the White House said in a fact sheet obtained by the Associated Press. With the total debt standing at $28.5 trillion, the government would be forced to slash federal programs unless the cap is either suspended or lifted.
If the U.S. failed to raise or suspend the debt limit, it would eventually have to temporarily default on some of its obligations, which could have serious and negative economic implications. Interest rates would likely spike, and demand for Treasurys would drop; even the threat of default can cause borrowing costs to increase.
The White House fact sheet shows the economic pain would trickle down to states, since so many aid programs rely on federal funding: The government’s ability to respond to natural disasters such as hurricanes, earthquakes or wildfires would be hampered. States would also face Medicaid shortfalls because the federal government covers two-thirds of the costs.