In December 2024, then President-elect Donald Trump asked Congress to include an increase of the debt ceiling in their continuing resolution spending bill. At that time, Congressional leaders balked at the idea. But, with the federal government set to hit the debt ceiling again in July 2025, Congressional Republicans announced at the end of March 2025 that they had agreement to include a debt ceiling increase in the budget reconciliation package.
Fights over the debt ceiling have become increasingly common in recent years, and once again, lawmakers find themselves squabbling over what to do so the federal government is able to pay its bills. If there’s anything Congress can’t do, it’s to take no action at all, as it would mean disastrous implications for both the US and global economies.
A Brief History of the Debt Ceiling
The debt ceiling, set by Congress, is a cap on the total amount of money the Department of the Treasury can borrow. The ceiling applies to nearly all debt accrued by the federal government, including over $28 trillion in debt held by the US public, and $7 trillion in debt the federal government owes itself for programs like Medicare and Social Security.
It should be noted that debt and deficit have different meanings. The deficit refers to the difference between revenue the federal government takes in from taxes and other sources across each fiscal year, while the debt refers to deficits accrued across multiple years.
The debt ceiling wasn’t always around. Originally, Congress signed off on all debt by authorizing individual bonds through legislation. However, the cost of financing America’s involvement in World War I led Congress to establish a debt limit though the Second Liberty Act to simplify the borrowing process and allow the Treasury Department to issue as many bonds as needed instead of waiting for Congress to approve every single bond.
In recent years, rising national debt and an increasingly polarized Congress have made the process of raising the debt ceiling much more contentious. Parties have occasionally sought policy concessions from one another in exchange for agreeing to raise the debt limit, leading to a few occasions where political brinkmanship has actually caused the federal government to hit the debt limit and trigger debt ceiling crises in 1995-1996, 2011, and 2013, when the government became uncomfortably close on defaulting on its debt.
The last time the debt ceiling was raised was on June 2, 2023, to its current level of $36 trillion in the Fiscal Responsibility Act.
What Happens If the Debt Ceiling Isn’t Raised?
Hitting the debt ceiling would mean the federal government would eventually be unable to make its debt payments after a certain period of time. This would result in the government defaulting on its debt obligations, something that has never happened in US history.
With the government unable to pay its debts, millions of daily obligations including Social Security payments, salaries for federal civilian employees and military servicemembers, veterans’ benefits, utility bills, and others, would have to be at least temporarily defaulted. Next, global financial markets would enter a state of turbulence, as both international and domestic markets rely on the stability of US financial instruments and the economy. Additionally, interest rates would rise and the demand for Treasury securities would fall as investors begin to reconsider the safety of Treasuries and either pull back or stop investing entirely. Higher interest rates would in turn have strong reverberations across the economy, impacting credit cards, mortgages, car loans, and other forms of borrowing and investment.
Even if the government doesn’t actually default on its debt obligations, the mere threat of default could result in some negative economic consequences. During the debt ceiling crisis of 2011, Standard & Poor’s downgraded the US credit rating from AAA to AA+ with the rationale that the debt limit fight was a sign of “America’s governance becoming less stable, less effective, and less predictable.” During the 2013 debt ceiling crisis, credit agency Fitch warned it may cut the US credit rating due to political gridlock, and Chinese rating agency Dagong downgraded the US from A- to A. In 2014, Fitch did however restore the US credit rating to AAA.
“Extraordinary Measures” to Stave Off Default
If the federal government does hit the debt ceiling in July, it won’t immediately default on its debt. That’s because the Treasury Department can take so-called “extraordinary measures” that were previously deployed during the debt ceiling crises in 2011 and 2013. Extraordinary measures are accounting maneuvers that allow the federal government to continue to borrow money and pay bills without exceeding the debt ceiling. These measures usually involve not fully investing federal employees’ Thrift Savings Plan and civil service retirement plan funds in special Treasury securities. For example, if federal employees have invested $100 billion in the Thrift Savings Fund, the Treasury could opt to issue only $90 billion to the fund, creating $10 billion that could be used to auction more debt to the public and raise more money for the Treasury. After the debt ceiling is raised or suspended, investments in those funds would resume and lost interest is credited back to the accounts, leaving the savings and pensions plans unaffected.
But extraordinary measures only provide a temporary means for the government to pay its bills after the debt ceiling is reached, and it’s not clear how long the Treasury Department can exercise extraordinary measures after July. For example, a March 2025 report from the Congressional Budget Office (CBO) projected that extraordinary measures would probably run out sometime at the end of September 2025. However, CBO said it could be as soon as August 1, 2025, if borrowing levels remained the same.
What Will Congress Do?
As in the lead-up to previous debt crises, lawmakers in both parties generally agree on the need to increase the debt limit but have yet to settle on any specific proposals, i.e. the amount of the limit.
The debt ceiling debate has now made its way into budget reconciliation. The compromise budget resolution includes instructions for a $5 trillion debt limit increase. During the debate, Sen. Rand Paul (R-KY) offered an amendment to strike the proposal and replace it with a $500 billion increase, providing a limited, 3-month extension to force Congress to vote again on the debt ceiling before what he called “continuing down the road of fiscal irresponsibility.” His amendment was shot down 5-94, with fellow Republicans Sens. Lee and Curtis from Utah voting for it.
The debt ceiling is a bipartisan problem that should involve a bipartisan solution. That said, Republicans have teed up resolving the debt ceiling using the partisan budget reconciliation process. What happens if reconciliation fails, or is delayed to the point that the federal government comes close to defaulting on its obligations? How will Democrats react if Congressional Republicans and the Trump administration need their votes to raise the debt ceiling when they’ve been left out in the cold during the budget negotiations?