The Debt Limit Debate
Mercatus on Policy Paper No. 91
4 Pages Posted: 29 May 2011
Date Written: May 26, 2011
On Monday, May 16, 2011, the United States reached the current statutory limit on the federal government’s borrowing power, the debt limit or debt ceiling, of $14.294 trillion. In theory, reaching the debt limit constrains the Treasury’s regular methods of financing federal activities or meeting government obligations. Treasury cannot issue new debt to manage short-term cash flows or to finance an annual deficit if such new borrowing causes the debt to exceed the statutory limit. Many fear though that Congress’s immediate failure to raise the debt ceiling will rattle the bond market, drive up interest rates, and possibly lead to the United States defaulting on its debt.
While the United States should not default on its debt, neither should Congress raise the debt ceiling without addressing the problem that created the debt: excessive spending. In exchange for raising the debt ceiling, Congress should put in place a credible plan that reduces future government spending and adopts institutional reforms for the federal budget process.
Keywords: debt ceiling, debt limit, federal budget, federal spending
JEL Classification: H6
Suggested Citation: Suggested Citation