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Thursday, May 26, 2011

The Debt Limit: History and Recent Increases

D. Andrew Austin
Analyst in Economic Policy

Mindy R. Levit
Analyst in Public Finance

Total debt of the federal government can increase in two ways. First, debt increases when the government sells debt to the public to finance budget deficits and acquire the financial resources needed to meet its obligations. This increases debt held by the public. Second, debt increases when the federal government issues debt to certain government accounts, such as the Social Security, Medicare, and Transportation trust funds, in exchange for their reported surpluses. This increases debt held by government accounts. The sum of debt held by the public and debt held by government accounts is the total federal debt. Surpluses reduce debt held by the public, while deficits raise it. Total federal debt outstanding was $14,308 billion on May 12, 2011, of which $14,256 billion was subject to the debt limit. The U.S. Treasury Secretary Timothy Geithner announced that the federal debt reached its statutory limit on May 16, 2011 and that he had declared a debt issuance suspension period, which would allow certain extraordinary measures to extend Treasury’s borrowing capacity until early August 2011. Funding federal operations could soon become complicated without a debt limit increase.

Congress has always placed restrictions on federal debt. The form of debt restrictions, structured as amendments to the Second Liberty Bond Act of 1917, evolved into a general debt limit in 1939. Congress has voted to raise the debt limit 10 times since 2001, as federal debt has nearly reached the debt limit several times due to persistent deficits and additions to federal trust funds. Congress raised the limit in June 2002, and by December 2002 the U.S. Treasury asked Congress for another increase, which passed in May 2003. In June 2004, the U.S. Treasury asked for another debt limit increase. After Congress recessed in mid-October 2004 without acting, the Treasury Secretary told Congress he could keep debt below its limit only through mid-November. Congress increased the debt limit in a post-election session, which the President signed on November 19, 2004. In 2005, reconciliation instructions in the FY2006 budget resolution (H.Con.Res. 95) included a debt limit increase. The Treasury Secretary sent letters warning Congress that the Treasury would exhaust its options to avoid default by mid-March 2006. Congress passed an increase that the President signed on March 20. The House indirectly approved legislation (H.J.Res. 43) to raise the debt limit by $850 billion to $9,815 billion. The Senate approved the resolution on September 27, 2007, and the President signed it two days later.

The recent economic slowdown led to sharply higher deficits in recent years, which led to a series of debt limit increases. The Housing and Economic Recovery Act of 2008 (H.R. 3221), signed into law (P.L. 110-289) on July 30, 2008, included a debt limit increase. The Emergency Economic Stabilization Act of 2008 (H.R. 1424), signed into law on October 3 (P.L. 110-343), raised the debt limit again. The debt limit rose a third time in less than a year to $12,104 billion with the passage of the American Recovery and Reinvestment Act of 2009 on February 13, 2009 (ARRA; H.R. 1), which was signed into law on February 17, 2009 (P.L. 111-5).

The House’s adoption of the conference report on the FY2010 budget resolution (S.Con.Res. 13) on April 29, 2009, triggered the automatic passage of H.J.Res. 45 to raise the debt limit to $13,029 billion. In August 2009, Treasury reportedly said that the debt limit would be reached in mid-October, although it later stated that the limit would not be reached until December 2009. H.R. 4314, passed by the House on December 16, 2009, and by the Senate on December 24, raised the debt limit to $12,394 billion when the President signed the measure (P.L. 111-123) on December 28. On January 28, the Senate passed an amended version of H.J.Res. 45, which the House passed on February 4 and the President signed on February 12 (P.L. 111-139), raising the limit to $14,294 billion.

Date of Report: May 16, 2011
Number of Pages: 30
Order Number: RL31967
Price: $29.95

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