The U.S. Government Accountability Office (GAO) describes the federal debt limit as a legal cap on the amount of federal debt that can be outstanding at one time. GAO explains that this limit does not set tax or spending policy. It limits the Department of the Treasury’s authority to borrow to meet obligations created by laws already in place.
GAO also states that decisions on spending and revenue are made separately from decisions on the debt limit. This separation can lead to borrowing needs that exceed the legal cap.
What the debt limit is
GAO states that “the debt limit is a legal limit on the amount of federal debt that can be outstanding at one time.” GAO notes it is an after-the-fact measure: it does not prevent Congress and the President from enacting future spending or revenue changes. It restricts Treasury’s authority to borrow to finance obligations that stem from those decisions after they have been made, according to GAO.
Who sets the limit and how borrowing works
According to GAO, Congress imposes the debt limit through law. To meet the federal government’s borrowing needs, Treasury issues securities in the form of bills, notes, and bonds. GAO says these Treasury securities play a vital role in U.S. and global financial markets.
What happens when the limit is reached
GAO reports that when outstanding debt reaches the limit, Treasury can take “extraordinary measures” and use available cash to continue making payments. GAO explains that extraordinary measures temporarily free up existing borrowing authority, but these measures and cash balances are limited and will eventually run out. GAO says that if these resources are exhausted before the debt limit is raised or suspended, Treasury could be forced to delay some government payments until sufficient funds become available.
The X-date and timing uncertainty
GAO explains that predictions about when the government will no longer be able to pay all of its obligations—the “X-date”—are inherently imprecise. The reason is the unpredictable size and timing of federal cash flows. GAO states that last-minute negotiations on the debt limit can increase the risk of a default and do not directly address structural spending and revenue levels that contribute to growing debt.
What a default would mean
GAO reports that if Treasury exhausts its borrowing authority and runs out of cash to continue paying government obligations, a default will occur. GAO states that a default would disrupt financial markets, with immediate, potentially severe consequences for businesses and households, and could inflict long-lasting damage on the U.S. and global economies. GAO has emphasized the importance of preserving confidence in the “full faith and credit” of the United States and warns that failure to increase or suspend the limit in a timely manner could increase borrowing costs.
GAO’s analysis of the process
GAO finds that separating decisions on spending and revenue from decisions on debt contributes to periodic risks of running out of borrowing authority. GAO has examined alternatives to the current process and recommends that Congress consider replacing it with an approach that links decisions about debt to decisions about spending and revenue at the time those decisions are made. GAO prepares analyses to assist Congress in understanding the factors that expose the United States to potential default, the immediate consequences for the financial system, and the longer-term consequences for the economy.