Debt Ceiling

The maximum amount of money that the United States can borrow by issuing bonds is known as Debt Ceiling. Under the Second Freedom Bond Act of 1917 and the debt ceiling was created and it is also known as the statutory debt limit or the debt limit. If the US government’s national debt reaches the cap, the Treasury Department must take other steps to meet government expenditures and other obligations the cap is increased again. The debt ceiling has been suspended or raised several times across the years so as to avoid the worst-case scenario of default. There have been numerous clashes regarding the debt ceiling, which have even led to the shutdown of governments.

About Debt Ceiling

Before the debt ceiling was established, Congress had a free hand on the finances of the country. In the year 1917, during the First World War, the debt ceiling was created to hold the federal government accountable for all financial policies. Over time, the debt ceiling was raised every time the country approached the limit. Reaching the limit and not paying interest to bondholders would put the United States in debt, thus increasing the cost of its debt and reducing its creditworthiness. Most democratic countries around the world do not have a debt ceiling, thus United States is one of the few exceptions.

Advantages of Debt Ceiling

Helps in keeping the US government finances in check. The debt can be used to fund various US government operations. The debt ceiling also improves the efficiency of the government’s ability to finance the various obligations, including Medicare benefits and Social Security.

Disadvantages of Debt Ceiling

The debt ceiling will be raised even higher when the cap is reached and doing so every time can cause problems. The risk non-payment of interest as well as default to bondholders increases the nations borrowing costs and reduces the solvency of the United States.