On Wednesday, President-elect Donald Trump dismissed a bipartisan proposal from Congress intended to temporarily fund the government, potentially averting a significant shutdown set to begin Friday night.

However, Trump did more than just oppose the recent funding agreement, which also included funding for disaster relief and salary increases for lawmakers. He urged Congress to either increase the debt ceiling or eliminate it entirely as they scramble to prevent a shutdown right before the holidays.

Trump stated during an interview with NBC News, “It would be the smartest move Congress could make to eliminate the country’s debt limit. I would fully support that.”

This prompts the question: what is the debt ceiling? When will the nation face this limit? Here are the key points you should understand.

Defining the Debt Ceiling

The debt ceiling represents the maximum amount of debt that Congress allows the government to incur. To settle its obligations and fund a variety of services, including Medicare and military salaries, the government must adapt the debt ceiling upward.

Established in 1917, raising this legislative cap requires majority approval from both the Senate and the House of Representatives. It’s important to note that this vote does not imply any new expenditures; it simply permits the government to borrow more money to fulfill existing financial commitments made by Congress.

Over the years, however, both political parties have linked the debt ceiling to broader government spending debates, often using it as leverage against the president.

Debt Ceiling Timeline and Deadlines

The ongoing suspension of the debt limit will conclude on January 1, 2025. This arrangement provides additional time for the Treasury Department to implement “extraordinary measures” to manage financial operations.

Consequences of Hitting the Debt Ceiling

The U.S. approached its debt ceiling last year, reaching it in late January. Following this incident, Treasury Secretary Janet Yellen indicated that “extraordinary measures” were taken to ensure the nation could meet its financial obligations and avoid default during ongoing negotiations between the two parties.

A default would occur if the U.S. government failed to fulfill payments to bondholders who had lent money.

The Impact of a Government Default

The United States has never defaulted on its debt. This reliability is why U.S. Treasury bonds are often seen as secure investments, providing stability against riskier market activities. A default would disrupt both the national and international economy, with the U.S. Treasury warning that it “would trigger another financial crisis and jeopardize the jobs and savings of ordinary Americans.”

In 2013, when the government came perilously close to default before raising the debt limit, the economy experienced a contraction of 1% in GDP.

Recent History of the Debt Ceiling

The debt ceiling is routinely adjusted to enable the nation to meet its repayment obligations. The most recent increase occurred in 2021.

A suspension of the debt ceiling took place last June, which is different from raising the limit since suspensions do not set a specific borrowing cap.

Just before a default was imminent, President Joe Biden and House Speaker Kevin McCarthy agreed to suspend the debt ceiling to facilitate future spending limits and address Republican concerns.

Despite the increasing politicization of the issue, raising the debt ceiling was previously regarded as typical government operation rather than a tool for political maneuvering.

Back in 2011, a standoff occurred between then-President Barack Obama and congressional Republicans, leading to a last-minute agreement to raise the ceiling just two days before the Treasury would have exhausted its funds.

The 14th Amendment and the Debt Ceiling

As anxiety surged last year concerning the potential failure to negotiate a debt ceiling increase, reports emerged that the White House was contemplating a last-resort strategy: a novel legal interpretation of the 14th Amendment.

During a May 9, 2023 meeting with congressional leaders, Biden mentioned he had not excluded this option from consideration.

The 14th Amendment primarily addresses equal rights under the law, but its fourth section reads, “The legitimacy of the public debt of the United States, authorized by law, shall not be questioned.”

Some legal experts believe Biden could reference this clause to argue that he possesses the authority to instruct the Treasury to repay U.S. debts even without congressional approval to raise the ceiling. This potential action, previously considered but not pursued by the Obama administration, would likely encounter legal challenges.

Countries with a Debt Ceiling

Denmark is another nation with a debt ceiling, but it does not experience the same level of political contention as the U.S.

This is partly because the Danish parliament holds more power, which helps to prevent the type of confrontations between legislative and executive branches seen in America. Moreover, Denmark has a more fiscally conservative approach, resulting in lower debt and a much higher initial ceiling compared to its actual debt levels.

What Does Raising the Debt Ceiling Entail?

Raising the debt ceiling involves increasing the permissible debt the country can accumulate to meet its financial obligations.

The debt ceiling does not restrict future expenditures; rather, it sets a cap on the amount the government can borrow to fulfill current legal commitments, such as Social Security and Medicare payments.

U.S. government bonds have traditionally been considered a secure investment because they are reliably repaid. However, a default by the U.S. government — the first in history — could lead to a decrease in the value of these bonds, triggering a chaotic situation in the global market.

Treasury bonds serve various purposes, including being used as collateral for international loans and providing support during bank losses.

Can Congress eliminate the debt ceiling?

Trump’s suggestion to abolish the debt ceiling isn’t a novel one in Washington; several Democratic members have recently advocated for its removal.

“I concur with President-elect Trump that Congress should abolish the debt limit and stop governing through hostage situations,” tweeted Democratic Sen. Elizabeth Warren, a leading progressive figure in Congress, on X on Thursday.

Conversely, some Republicans who support Trump have previously expressed reservations about this approach. Many conservative legislators emphasize reducing the national debt and often incorporate this pledge into their campaign promises.