The House passed a recent Senate amendment to increase the U.S. debt ceiling. This raises the debt ceiling by $1.9 trillion, moving the total amount that the government can borrow up to $14.3 trillion, the highest level ever allowed. Yet the debt ceiling has never been a limitation on how much the government can borrow, rather is an endorsement by Congress of how much the Department of Treasury has already borrowed.
As the figure below shows, since the Second World War, debt has almost always been equal to the legal limit. The ceiling isn’t a limit; it is the debt. All of this comes from the vicious cycle between the debt and the ceiling. First, Congress sets, and subsequently exceeds, its spending. As long as this spending exceeds revenue, Treasury has to finance this spending by issuing more debt. Treasury quickly hits its limit—think of it like maxing out a credit card. In the meantime, Congress approves more spending, which Treasury now cannot finance. Then Congress raises the ceiling and can approve more spending.
As a result Treasury doesn’t view the ceiling as a bound. In fact, Treasury announces in advance when it’s going to need more debt room. In its debt refunding release last November, the Treasury admitted that, “based on current projections, Treasury expects to reach the debt ceiling in mid- to late December.”
Previously on this blog, Vincent Reinhart wrote that this $75 billion refunding was the largest in history. Just this week Treasury outdid itself by announcing that the next refunding will by for $81 billion in coupon securities. Nor does it show signs of scaling back such purchase. Instead, Treasury’s Borrowing Advisory Committee explained this week that severe cutbacks in Treasury sales could actually damage markets. Like the rest of Treasury, the Borrowing Advisory Committee called raising the ceiling an “anticipated” move.
Delegation of debt to the Treasury and creation of the ceiling have given Congress a nice political cover. Members vote explicitly on the ceiling, not the debt level; too bad it’s congressional spending that creates the need to raise the ceiling in the first place.