The debt ceiling implies to the total sum of money the United States government is authorized to borrow in order to meet its existing legal obligations. As Kavan Choksi Professional Investor mentions, these obligations typically include military salaries, Social Security and Medicare benefits, tax refunds, as well as interest on the national debt. One must understand that debt limit does not authorize new spending commitments. Rather, it just enables the government to finance discerning existing legal obligations that Congresses and presidents of both parties have previously made.

Kavan Choksi Professional Investor discusses why does the US debt ceiling matter

Not increasing the debt limit can lead to catastrophic economic consequences. It would cause the United States government to default on its legal obligations, which is an unprecedented event in American history. It may also give rise to another financial crisis, and threaten the savings and jobs of many everyday Americans. Due to this reason, Congress has always acted when called upon to raise the debt limit. Since 1960, Congress has acted more than 70 times to raise, revise or temporarily extend the definition of the debt limit.  As the federal government runs a deficit, it borrows funds in order to cover the difference. This money typically comes from issuing IOUs in the form of US Treasury securities. The debt ceiling is a legal limit on the amount of borrowing the Treasury can do.

Prior to 1917, each and every loan issued by the United States Treasury required authorization from Congress.  As the country entered World War I, the Congress however changed the law in order to allow the Treasury to sell war bonds or Liberty Bonds as required, as long as the bond sales did not exceed a specific amount or debt limit.

If Congress is faced with a decision in regards to the debt ceiling, it may either opt to raise it by a fixed dollar amount o decide to suspend the debt limited for a certain period of time. In case the Congress raises the debt ceiling, the US Treasury would be able to continue to issue debt as required till itreaches the new debt limit.

For instance, in December 2021, Congress increased the debt ceiling from $28.9 trillion to $31.4 trillion, allowing borrowing to continue until the total government borrowing reached this new threshold, which occurred on January 19, 2023. Conversely, when a suspension period concludes, the debt limit is reinstated at a level that accommodates the federal borrowing incurred until that point. In August 2019, the debt ceiling, then at $22.0 trillion, was suspended for 24 months, during which the Treasury borrowed an additional $6.4 trillion. When the suspension period ended in the August of 2021, the debt limit was restored to $28.4 trillion, which is the sum of the prior limit and the additional borrowing.

As Kavan Choksi Professional Investor points out, once a debt limit is reached or a debt suspension period concludes, the U.S. Treasury loses authorization to borrow more funds. Subsequently, the Treasury may resort to “extraordinary measures” to prevent the debt subject to the limit from increasing until Congress takes action.